This kind of talk certainly won't endear him to the Obama administration who will have no such talk. Winding down "too big to fail" banks makes much too much sense except to those with political power in London or Washington. How would they make friends if they did this? Timmy Geithner might lose a tennis partner talking this kind of madness. Mervyn King has made mistakes in the past but he's also been one to point out the long term problems of bankers being paid too much and sapping talent from professions that actually add value to the system. And now this.
He voiced opposition to high street banks having taxpayer-funded guarantees for their speculative investment banking activities and expressed scepticism about changes to regulation in the aftermath of the run on Northern Rock that would limit the Old Lady of Threadneedle Street to delivering "sermons".At least someone is learning from mistakes of the past. Pity we can't say the same in the US yet. When Obama and the Democrats launch their Stimulus Phase 2 effort, Americans are going to look closely at what changes have been made so far. Until there is real reform, it's going to be difficult to gain much enthusiasm for the next stimulus plan no matter how important it may be.
In a clear divergence with the chancellor, King said: "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."
The governor argued that "something must give".
"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements. Or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three," King said.
