Radical shake-up of UK banking system needed

| March 29, 2010

MPs are calling for a radical reform of the UK banking system so that taxpayers are not footing the bill for future bail-outs.

In its latest report into the banking crisis, published today, the Treasury Select Committee said taxpayers would not stand for another bail-out of the banks and is urging ministers not to rule out the break-up of too-big-to-fail banks in a future overhaul of the industry.

However, the Government is against breaking up major competitors in the sector, arguing that both safer banks and riskier investment banks were affected by the financial crisis.

The report states that “Reform is particularly pressing for the United Kingdom. In the 1970s the UK banking sector had a balance sheet of 50 per cent of United Kingdom GDP; it is currently 500 per cent of GDP.

“During the financial crisis, Governments have effectively stood behind the banking system. If international banking in the United Kingdom is to remain credible, reform must ensure that the taxpayer is better protected from picking up the bill,” it added.

Chairman of the Committee, John McFall, added that the irresponsible lending of the boom years should not be replaced with “equally irrational restrictions” on banks.

However, he is calling for policymakers to strike a balance between changing the system and protecting consumers.

He said: “The more consumers are protected, the more risks taxpayers may have to bear; the more banks have to pay for their capital, the higher the rates they will charge their customers.

“Policymakers will have to decide where the trade-offs should properly be made and how this should be explained to the public,” he concluded.

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