BoE Governor calls for banks to be split

| October 21, 2009
”BoE

Bank of England Governor, Mervyn King, warned last night that a major rethink of how banks are structured is required.

Addressing Scottish business leaders in Edinburgh last night, Mr King’s comments came after it was announced that public finances suffered their worst six months on record between April and September.

In his speech, Mr King said that Government support for the banking industry had been “breathtaking”, hovering close to the £1 trillion mark.

Consequently, the Governor criticised those who are delaying reform of the banking sector and warned that the UK would be paying for the impact of the financial crisis on its public finances “for a generation”.

The Governor is calling for banks to split their core business from riskier practices, so they do not get too big to be allowed to collapse.

It was a subject that arose at the recent G20 summit and at the time the G20 leaders said tighter regulations may not be adequate, because if banks knew they would be rescued if problems occurred, they would continue to take risks, said Mr King.

The Governor is suggesting separating a bank’s businesses, such as holding savings offering loans to households and businesses (which would be safeguarded), while riskier practices would not receive protection from the Government.

He comments: “Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.”

“Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are,” he added.

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