View more on these topics

Brown hits back at King’s banking proposals

Prime Minister Gordon Brown has publicly rebuked Bank of England governor Mervyn King’s proposals to split the UK banking sector in two.

Last night King reiterated his desire to reintroduce the Glass-Steagall act and split the banking sector into utility banking and investment banking.

But Brown attacked the governor’s proposals in Prime Minister’s question time today. When asked about the speech by Liberal Democrat leader Nick Clegg, Brown said that splitting the banks would not prevent them from collapsing, and only global regulation would shore up both sides of the banking sector.

He said: “[You] must remember that Northern Rock was effectively a retail bank and it collapsed. Lehman Brothers was effectively an investment bank without a retail bank and it collapsed. The difference between retail and investment banks is not the cause of the problem.”

Ignis economist Stuart Thomson, who attended King’s speech in Edinburgh last night, says the governor is using the Glass-Steagall argument as a means to carry on trying to reinforce a change in the sector.

He says: “King was asking for the moon and then asking for an alternative in the form of contingent capital – capital issued by the banks which, on certain valuation triggers, is converted to common equity as a buffer. He is desperate to return to the status quo as he is worried that the banks will think we are returning to a time where everything is OK.

“King wants to change the system, he wants Glass-Steagall but he will affect a lesser reform like contingent capital. King is desperate not to return to the status quo as he is worried that the banks are now just stepping out the shower and will think we are returning to a time where everything is OK”

Other experts agree that while King’s pleas are well-intended, hoping for a return to narrow banking could be a step too far.

Schroders chief economist Keith Wade says: “The problem is that it would be very difficult to enforce a banking sector split unilaterally – it would be very difficult indeed to make this a global precedent. It’s not even as though everyone is in agreement in the UK even – the Government has publicly said he would prefer to regulate the sector through capital requirements.”

“King is desperate not to return to the status quo as he is worried that the banks are now just stepping out the shower and will think we are returning to a time where everything is OK”

Stuart Thomson, Ignis

Thomson agrees: “We have Basel because it is the best system that the US banking system could buy – they lobbied for Basel and are vehemently against a return to Glass-Steagal. It is extremely unlikely that the US administration or any global co-operation would be able to put the genie back into the bottle.”

Royal London Asset Management head of equities Jane Coffey says any changes to the banking sector will probably be forced by increasing capital adequacy requirements rather than sweeping structural reforms.

She says: “The UK wants to lead the field of thought and research on this, but they will not risk the financial system with regulatory arbitrage where the rest of the world can work with lower capital and therefore lower costs.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. This GB has done enough damage to the Banking and Financial Services Industry already.

    Get Rid of the P L O N K E R! And the sooner the better!

  2. Given that the banking crisis was allowed to brew up on Gordon Brown’s watch as chancellor, I hardly think he’s in a position to criticise anyone else’s suggestions for a way forward and out of the present mess.

  3. And the Tories want to return banking supervision to the BofE? What does the outside world think of this lack of coherent strategy and the public display of disagreement? Does King tell anyone in government what he thinks before he causes so much uncertainty? Is he right? Is he wrong? Who cares, all we want is for somebody to sort it all out, is that too much to ask? Until recently I thought the Tories were the answer, now I am not so sure, are you?

  4. SIMON MANSELL - Open Letter 21st October 2009 at 6:20 pm

    Mr King

    Open Letter to Mervyn King, Bank of England Governor – “Banks & Moral Hazards”

    As Bank of England Governor you have warned (20/10/) about the dangers posed by banks that are “too important to fail.” You discuss the risk of economic disaster, resulting from the over centralisation of power in a small number of big banks. You say this will result in the “biggest moral hazard in history”. I agree!

    Your solution is to split up banks and separate riskier activities from more stable businesses such as taking deposits. I understand that you views are at odds with that of Chancellor of the Exchequer Alistair Darling, Chancellor, head of the Treasury and also master of the Financial Services Authority (although this is denied).

    Yet Darling and Brown plan even greater risks with further over-centralisation of power within the large banks, increasing the risks of failure yet further! The FSA wants to hand over independent distribution of financial services to the banks. They are doing this on the false premise of consumer advantage!

    In 2007 FSA representation said Independent Financial Advisers generated 48.3% of financial service distribution compared to banks at 36.2%. The FSA Retail Distribution Review threatens to kill off independent financial advice in the UK for all but the wealthy and hand over IFA distribution to bank-based advisers – those primarily responsible for PPI misselling, endowment mis-selling, investment mis-selling and generally poor advice all round! The very “moral hazards”that you warn against!

    FINANCIAL OMBUDSMAN SERVICE COMPLAINTS 2008/09
    banks: 59%
    independent financial advisers (IFAs): 3%*

    Ernst & Young’s says: “Given the changing dynamics we foresee a reduction to approximately 10,000 IFAs by 2013, the majority of this reduction happening towards the end of 2012 but there will be casualties in the shorter term too.” A study by Aviva comes to a similar conclusion and claims that the number of Independent Financial Advisers (IFAs) operating in the UK will fall to 10,000 by 2013.

    If each IFA has only 200* clients and if 10,000 leave the industry, then 2 million clients will be forced into the hands of the large banks.

    This is FSA policy,
    This is Treasury policy
    This is Darling and Brown’s policy.

    I assume this is not your policy! I hope that your warnings will be listened too and extended to the planned Retail Distribution Review – better named as Retail Redistribution Review?

    Yours sincerely

    SIMON MANSELL
    TEMPLE BAR IFA LTD

    Many in Financial Services believe FSA policies have and will prove disastrous to both businesses and consumers alike. If ypou share this view sign the no confidence petition:

    PLEASE CLICK AND SIGN: http://petitions.number10.gov.uk/FSANOCONFIDENCE/

  5. N/R and HSBC should have been allowed to go to the wall it would have been cheaper to pay out savers than plowing endless amounts of tax payers money into a failed enterprse and that would have put the bankers firmly in their place brown just lets the bankers do what ever they like Knowing that he will just keep printing money for them to carry on enjoying their lavish life styles with brown hoping to join them when he is finally thrown out of power

  6. Please correct me if I have it wrong, Financial Institutions have been involved in asset based trading which entails selling loans on the secondary market that has taken on global proportions. Within these blocks of assets being sold there is the possibility of loan agreements that are risky for example the loan to value could be as high as 125%. It also appears that the original underwriter of a mortgage loan is absolved of any further responsibility once it has been traded. The capital raised in the sale of these assets can be recycled to fund more mortgages and the process repeated.
    On the basis that the seller makes a return on the sale of the loan agreement as well as relinquishing responsibility for the underwriting and the buyer benefits from a discounted purchase (in the knowledge that some of the loans could be risky) this could provide the lender with the opportunity to increase market share by appealing to a wider audience such as self- certified, sub-prime, flexible mortgages with high loan to values etc.
    Sounds great everybody is making money, property values increase with the scarcity of property to meet demand, until of course the property market slumps as it did initially in the US. Suddenly the unthinkable happens the loan agreements lose their asset values causing the banks to lose confidence in lending to each other and the result is a global credit crunch resulting in these financial institutions either being bailed out by the taxpayers or overseas investors or simply being left to go bankrupt.
    I fail to see what the above has to do with the majority of Mortgage Advisers who have the responsibility to offer their clients the most suitable mortgage products to meet their individual needs, within the terms and lending criteria given by the product providers and to ensure affordability on the financial information supplied at the time of application?
    Mortgage Advisers do not have a crystal ball on future affordability, neither do they collect loan repayments, predict property values or trade loan agreement to a third party. These issues should be addressed with the Financial Institutions concerned and I believe Mervyn King is right to promulgate a split of the banking sector into utility banking and investment banking where a greater degree of control can be exercised. I also strongly feel that as far as independent financial advice is concerned this should also be split away from banks and they should refer their customers to IFAs that have the necessary qualifications and experience. In my opinion the banks financial sales personnel would be better employed selling retail banking services.

  7. It is a shame that Brown and his gang listen to nobody; Mervyn King should be the first person they listen to, after all they set up the current system for just that reason.
    The reasons for wanting to continue the status quo seem clear, Brown intends to sell back the stinking pile of garbage that they bought to an averistic public asap. Institutional investors should ignore it; they will not of course.
    If Brown refuses to bring some sense and security to the banking system, it is time new banks were established to do the ‘boring stuff’ and provide the populsce st lsrge with the services they need. The casino operators can then be allowed to sink next time they fall in the s**t.

  8. 6MK0yH pxsclkymjoit, [url=http://aojwirjwddtg.com/]aojwirjwddtg[/url], [link=http://qxocwyxgilyd.com/]qxocwyxgilyd[/link], http://yxhizuaonztj.com/

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com