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MM Leader: Bank splits could cut risk

Bank of England governor Mervyn King’s speech last week to Scottish business leaders certainly hit the right chord with many.

King warned that the moral hazard of bankers continuing to make huge profits and undertake risky activities while the sector is effectively underwritten by the Government cannot continue.

He said current plans to tighten regulation and increase capital adequacy are insufficient and that a clear split between utility banking operations and more risky activities is needed.

King claimed it was delusional to suggest appropriate regulation could ensure speculative activities do not result in failures.

FSA chairman Lord Turner is concerned that a clear split would be unworkable, instead suggesting banks with riskier banking operations should have to hold more capital and that banks be required to write living wills.

A clear separation between so-called casino banking and utility-banking operations does have obstacles but the goal of creating smaller more manageable banks, with a focus on either investment banking or utility banking, is a sensible one.

Whether this is best created through direct and forceful Government intervention, as King suggests, or as a result of the new capital regulations and market pressures is open to debate, with King and Turner both putting across persuasive cases.

King believes banks cannot be trusted to run more speculative activities alongside the implied Government support that accompanies being “too important to fail”. Looking back at recent events, it would be a brave man who disagrees.

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