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.