Rift Over Calls For Banking Reforms

A rift over regulation of the banks emerged last night between the governor of the Bank of England and the chancellor of the exchequer.

In a major speech at Mansion House in London before an audience of bankers and other City grandees, Mervyn King laid out radical plans for clamping down on banks.

Mr King called for a restriction on the size of banks that are "too big to fail" while the chancellor told the same event that he had no plans for fundamental changes to the current system of regulation and opposed a break up of the big financial institutions.

Mr 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.

"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."

At odds with remarks made by Mr King, the chancellor said: "Many people talk about how to deal with the big banks – banks so important to the financial system that they cannot be allowed to fail. But the solution is not as simple, as some have suggested, as restricting the size the banks."

Mr King said the Bank could no longer act "like a church" whose congregation "ignores its sermons".

Mr Darling called for "a change of culture" in which bank staff were "rewarded for long-term success, not for failure" and said boardrooms should have "the right people, skills and experience to manage themselves effectively".

While Mr King said: "Blaming individuals is no substitute for acknowledging the failure of a system, of a certain type of banking. We have a real opportunity now to put that right and regain the trust that has been lost."

Both Mr King and the chancellor remained cautious about signs of recovery in the economy.

(GK/NS)