King wants radical change to end bailout expectations

28 January 2010

Bank of England governor Mervyn King has told MPs that financial reform is needed so that there is no longer an expectation on Government to bail out troubled banks.

Speaking to the Treasury select committee on Tuesday, King said regulation was not going to stop banks taking risks and that shareholders and uninsured depositors should bear the costs of any future bank bailouts
rather than the taxpayers.

He said: “We need to try to get to a structure of the financial sector which is one in which those who provide the finance for it believe, rightly, that they will not be bailed out when they get into trouble.”

“The key point is to accept that these risks will go wrong at various points in the future. We have got to accept that the peoplethat provided the private finance to that venture, both theshareholders and the uninsured depositors, bear the cost. We have got to have a structure of banking that makes that possible and at present it is not.”

King said the UK could still sustain a large banking centre - which has a total value of around five times the UK’s GDP - but only if it was not a substantial burden to the taxpayer. He said: “There is no reason why we cannot have a large banking system, provided we can do so in a form which does not require the likelihood of a bailout by taxpayers every now and then when something bad goes wrong.”

King said radical reform is necessary to address the structural problems in the banking sector and it is important to look at a range of solutions - what he called “a three-legged stool” approach. He said this approach would mean a mix of resolutions, inc luding reform of capital requirements, making it clear that no institution can be bailed out because it is too complex to go under, and reform of the structure of the banking system.

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