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King says Govt must remove bail-out expectation

Bank of England governor Mervyn King has told MPs 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 this morning, King said regulation was not going to stop banks taking risks and that the shareholders and uninsured depositors should bear the costs of future bank bail-outs, rather than the taxpayer.

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.”

He added: “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 people that provided the private finance to that venture, both the shareholders 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 that 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’s no reason why we can’t have a large banking system, provided we can do so in a form which doesn’t require the likelihood of a bail-out by taxpayers every now and then when something bad goes wrong.” 

King added that 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: “What we in the bank have put forward is the idea of a three-legged stool, that is it doesn’t make sense to rely on any one set of proposals when there is a real uncertainty about what is the right way of dealing with the problem.

He said this approach would mean a mix resolutions, including reform of capital requirements, making it clear that no institution  can be bailed out because it is too complex to go under, and a reform of the structure of the banking system.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. King is quoted as saying “regulation was not going to stop banks taking risks”.

    Is there, therefore, any hope of any meaningful regulation of the banks on the part of the FSA ~ ever ~ or is Mr King of the view that as far as regulating the banks is concerned, the FSA isn’t up to the job?

    To which the wider community might add “Is the FSA up to regulating anything much at all other than after everything’s gone wrong?”

  2. I can’t believe Merv said both the shareholders and the uninsured depositors, bare the cost. Surely he said ‘bear the cost’?

    Just shows that even in the Grammar school era people couldn’t spell… or is it just ‘sloppy’ journalism

  3. The FSA should be abolished – as they are really a Trade Union for the major Banks and their sole aim is to destroy the intermediary marketplace – and ensure we all HAVE to deal with the big boys. Casino banking must end. What we need is proper regulation of the banks by the BOE.

  4. I sympathise with Julian Stevens because to an outsider this is a logical conclusion to arrive at, however, the input of HM Treasury is to blame for most of the lack of regulation in banking because they lobbied for an easy time and got it. Gordon Brown was misled and we are paying the price now, in fact unborn generations will be shackled to the banking fiasco.

    Mark Webb reflects the opinions of many firms I know, it is a fact that this is the direction regulation has followed but it is down to the powerful lobbying of representative bodies rather than the mindset of the regulators.

    Society needs balanced regulation, I see none, it therefore follows that no regulation might be easier to accept than what we see before us which as created under prescriptive regulation.

    There is another way folks, we can involve the distribution model which ‘generates’ few complaints, if the regulators are in the mood to work with us of course! But in order to facilitate adult contribution from IFAs with decades of experience at the ‘coalface’ we need a ceasfire, no more ‘Kenmir effects’ please and that means a stay of execution on the RDR.

    In return I would ask IFAs to desist from ‘heckling their opponents’ and turn to constructive dialogue with their regulator.

    Under the current system this will be difficult for small to medium sized firms whether they be investment, insurance or mortgage intermediaries so I propose a new model.

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