King out on a limb

Mervyn King does not mind courting controversy. His speech this evening can be taken as a blast against the prevailing direction of banking reform, criticising efforts to prevent future failures with more and better capital, and seeking a separation of the boring functions of banks from the risky bits.

“The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”

Instead he wants to prevent banks being “too important to fail” by making them safe and splitting the deposit taking and payments systems from speculative ventures. He does not mention Glass-Steagall but that legislation is there in spirit. Going through options from draconian narrow banking ideas to more modest bans on proprietary trading, he says:

“The common element is the aim of restricting government guarantees to utility banking. There are those who claim that such proposals are impractical. It is hard to see why.”

This is not the direction of the G20 proposals, which seek just the “deluded” tougher capital rules Mr King rails against in order to “allow banks to withstand those losses that inevitably will come”.

The other interesting thing in the speech is that Mr King is rowing back from his desire for new “macroprudential” tools to supplement interest rates and act to cool a future credit bubble even when the wider economy is not showing signs of stress. Don’t get him wrong, he still wants the tools, but is now playing down expectations of their likely success in a country such as the UK with foreign-owned banks able to circumvent any regulations imposed by the Bank.

“The crisis certainly suggests that there is a need for additional policy tools that can (a) moderate the growth of the financial sector and (b) lean against the macroeconomic effects of the credit cycle. The Bank is working with others to explore such macro-prudential instruments, and we will be setting out our thinking in a discussion paper and a speech by Paul Tucker later in the week. Given the difficulty of applying such tools to overseas banks, their use in (a) is likely to be more productive than in (b).”

Oh, and the governor has finally said in public his favourite phrase of the moment which, I gather, many at the IMF and World Bank meetings in Istanbul this month heard many times. Without apologies to Winston Churchill, he said:

“Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

Quite.

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