Mervyn King: 'biggest moral hazard in history'

Mervyn King: bail-outs created 'biggest moral hazard in history'

The Governor of the Bank of England on Tuesday night launched his fiercest attack yet on big banking

By Edmund Conway
Telegraph, 20 Oct 2009

Mr King said that it was insufficient to expect that tighter regulations alone would be enough to prevent banks from generating financial crises Photo: Bloomberg News

Mr King indicated that high street banks could and should be separate from their risky investment banking wings and calling for a reconsideration of the financial system's structure.

In comments which will be seen as a clarion call for a potential break-up of Britain's banks, the Bank of England Governor warned that the support handed out by the Government had "created possibly the biggest moral hazard in history". He said that it was insufficient to expect that in the future tighter regulations alone would be enough to prevent banks from generating financial crises.

The warning goes against the grain of efforts by Governments on both sides of the Atlantic, which have tacitly ruled out splitting up the biggest banks and opted instead to scrutinise them more actively. Mr King, who said earlier this year that if banks are "too big to fail, then...they are too big," said that there is a risk the financial crisis comes and goes but the current system, in which big banks enjoy an effective guarantee from the state, remains.

In a speech in Edinburgh, he said "It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong."

He added: "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion," adding: "It is hard to see how the existence of institutions that are 'too important to fail' is consistent with their being in the private sector."

Experts have said that one lesson is that banks with large household deposits should not be allowed to practice the risky trading which, ultimately, led to their near-collapse, since this leaves the entire economy at risk. However, neither the Government's White Paper on financial regulation nor the Conservatives' plans proposed breaking up Britain's four big banks into utility style high street outlets and riskier investment banking arms.

Although he stopped short of calling for an immediate break-up, Mr King said: "There are those who claim that such proposals are impractical. It is hard to see why."

By Edmund Conway
Published: 9:58PM BST 20 Oct 2009