Launching the Lib Dem’s “A new deal for the City” manifesto today leader Nick Clegg and Shadow Chancellor Vince Cable said banks should either be extremely prudent, like utility companies, or choose to take risks at their own peril.
If they choose to operate in a similar way to water companies, their rate of return will be capped by the FSA and their ability to take risks would be very limited. But they will be able to go to the BoE as lender of last resort.
On the other hand, if banks choose to take risks in search of high yields they cannot expect the BoE to bail them out and must go to their shareholders to plug any gaps through rights issues.
Clegg said: “Banks should either choose a conservative model whereby they take few risks and the emphasis is on servicing the basic needs of depositors. In return for this the bank can legitimately ask the Government for help. But if banks have a business model where they take risks and play the market pursuing high returns, and this model is found wanting they must go to their shareholders for money. We can’t continue with the current system where banks can pursue reckless strategies and when things go wrong go to the taxpayer.”
Cable said depositors would have to be properly protected in the latter case but it would allow banks to be “truly competitive”.
He called again for counter cyclical reserves, and said it would be the BoE’s mandate to call the cycle.