Better remedies

18 June 2009 By Hugo Dixon Follow @hugodixon

The Bank of England boss says banks shouldn t be allowed to be too big to fail and that the BoE needs more powers. But he isn t openly calling for radical remedies such as separating retail and investment banking or combining watchdogs. Fortunately, there are alternatives.

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Mervyn King, the Bank of England governor, called for tougher regulation to stop banks being too big to fail in his annual Mansion House speech.

It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure, he said.

Something must give. Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements, or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three.

He argued that banks should produce plans for an orderly wind down of their activities to help authorities deal with crises.

King also hinted strongly that the BoE needed more powers. It is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.

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