Bagehot's ghost

26 October 2010 By Peter Thal Larsen Follow @Peter_TL

The Bank of England governor has backed away from his singleminded idea of separating retail and investment banking arms. But he is still rightly determined to remove the taxpayer safety net from private institutions. UK banks hoping to defend the status quo face a tough fight.

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Mervyn King, the governor of the Bank of England, on Oct. 25 set out a string of options to make the banking system safer.

"Of all the many ways of organising banking, the worst is the one we have today," he said in a speech in New York.

King examined a range of potential solutions to improve the safety of the system. These include: bank taxes, limits on leverage, higher capital requirements and greater liquidity reserves. He also examined additional capital requirements for systemic financial institutions; "living wills" that make it possible for banks to be wound down safely; and the possibility of separating the payments system from riskier banking activities.

King did not advocate any single solution, deferring to the UK's Independent Commission on Banking, which is due to report next year.

However, he said the new Basel rules, agreed by regulators earlier this year, would not, by themselves, prevent another crisis. "If it is a giant leap for the regulators of the world, it is only a small step for mankind," he said.

King added: "What we cannot countenance is a continuation of the system in which bank executives trade and take risks on their own account, and yet those who finance them are protected from loss by the implicit taxpayer guarantees."

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