Giving his views on the future of banking, King stressed that his opposition to having firms that are deemed “too big to fail” is because of the potential cost to the taxpayer if they need to be bailed out.
“W can set out possible alternative models for the structure of banking, but not very much will happen,” King said. “It won’t actually prevent the next crisis – the next crisis will be even bigger.”
Policymakers around the world are trying to redesign the financial system to repair the damage done after the credit crisis and to reduce pockets of risk so that banks and the authorities are better equipped to deal with future shocks.
But concerns have surfaced that appetites for change could dwindle now that the worst of the crash appears to be over and economies are returning to growth.
King said devising plans for banks in trouble and imposing tougher liquidity and capital rules on the financial sector were needed but said structural reforms such as “firebreaks and firewalls” in the system were also necessary.
“The proposals for narrow banking seem to be irrefutable,” he said.
He said he is not in favour of splitting banks but wants to impose internationally-agreed restraints to make sure financial institutions hold more capital and don’t incentivise risky behaviour.
The Conservatives, tipped to win an election due by June, are in favour of some kind of separation within banks and also plan to put the central bank in charge of macro-prudential financial regulation.
TOO BIG TO FAIL
“One of the consequences now with the implicit subsidy of too important to fail is there is an advantage to being not so much large in terms of size but large in terms of scope,” King said.
“So you really want to have a big link to the payments system of retail deposits and a lot of other things because you know the government cannot afford to let you go under. We need to get rid of it.”
King said splitting retail banking to safely deal with consumer deposits and hiving off some of the riskier activities of investment banks would help build a stronger financial sector and mean that taxpayers were not underwriting everything.
“Some of the more radical reform that has been proposed have an immense attraction because many of these judgements would be left to the market,” he said.
King would like to see banks that handle vital payments and retail deposits backed by cast-iron guarantees separated from the riskier parts of the industry which should operate without implicit state support in case of failure.
He said Britain could not sustain itself as a large centre for finance if that implicit subsidy remained.
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