King’s blast at banks is highly significant
21 Oct 09
Bank of England governor Mervyn King laid into the banks, and failure to reform the banking system, in a speech in Edinburgh this week. Could that be a sign of reforms to come?
The latest furore over banking bonuses was fuelled by a report from the Centre for Economics and Business Research (CEBR) predicting that payouts for bank staff and directors would reach £6bn this year, 50 per cent more than in 2008.
The argument over bonuses and the G20’s – in many people’s view – half-hearted attempt to rein them in has, to some extent, masked the fact that so far, proposals to reform the banking system have been very limited.
The Enron scandal affected a much smaller number of people than the financial crisis that erupted last year, and even Enron’s losses were minimal compared with the billions that taxpayers all over the developed world have had to pour into the banking system.
Enron resulted in a massive exercise in increased regulation for all US-listed companies. So far, proposals for ensuring capital adequacy at banks, and improving communication between regulators, look more like tinkering with the system than a root and branch reform.
Maverick voices such as economist John Kay have been calling for a more radical restructuring of the banking system, but this week they were joined by none other than Mervyn King, governor of the Bank of England.
In a speech to business organisations in Edinburgh, King said: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”
He argued that allowing banks to become “too big to fail” was the crux of the problem, and suggested that restructuring the banking system, dividing risky “investment banking” operations fro safe but essential “narrow banking” could be the way forward.
King added: “Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk. That is what economists mean by 'moral hazard'. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore.”
It’s been widely reported that Mervyn King is highly regarded by the Conservative front bench and, should David Cameron’s party win the next UK elections, it’s likely the Bank of England will have an even bigger part to play in regulating the banking sector. Mervyn King’s radical views are therefore an interesting taster for what might come next.
During the crisis, the UK government was the first to adopt a radical solution that managed to stabilise the situation, in the short term. Could the UK also pioneer a radical solution for the long term?