Bank of England governor Mervyn King lambasted the banks this week, saying that the cost of propping up the banking system was “breathtaking” – around £1trn. He added: “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 reform.”
Banks remain “too important to fail”, said King. But they should be broken up, with regulated everyday functions such as deposit-taking kept separate from risky areas such as trading or investment banking, to avert another crisis. Meanwhile, the row over soaring bank profits and bonuses escalated, with calls for a windfall tax on the banks to claw back some of the money earned on the back of taxpayers’ support.
What the commentators said
King is right to concentrate on banks that are “too big to fail” because it is the “central problem”, said David Prosser in The Independent. As long as the world has banks whose collapse would pose a systemic threat, it is obliged to act as “their guarantor of last resort”.
The knowledge that the banks themselves won’t have to pick up the pieces if things go wrong encourages recklessness, so the “moral hazard” problem endures, agreed Damian Reece in The Daily Telegraph. All that’s happened post-crisis is that the taxpayer support “has gone from implicit to explicit”. Hence the danger of “Credit Crunch II”. Separating retail from investment banking “is the sort of root and branch change” needed to escape moral hazard.
But the plan is “sharply at odds” with the direction of international banking reform, where the emphasis is on beefing up regulation rather than on structural change, said Chris Giles in the FT. That’s why King should concentrate on “better solutions” to the “too important to fail” issue that he didn’t explore fully, said Hugo Dixon on Breakingviews.com. He mentioned bigger capital and liquidity buffers, but didn’t say that the bigger the bank, the bigger the capital cushion should be. The more capital you have to hold, the less you can put to work – so this would encourage banks to split into smaller units.
Banks should also have to pay a fee in proportion to their reliance on short-term wholesale money. That way they are effectively paying for central banks to act as lenders of last resort. Moreover, if banks are forced to adopt “living wills” – plans for their own collapse – it would encourage them to “simplify their operations”. Combining these measures “would tackle the ‘too big to fail’ problem head-on”.