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.”