Well it appears that Governor of the Bank of England thinks so… It seems that the man with the biggest job in the UK financial sector, second only to the chancellor, thinks that it might just be time to re-evaluate the way our banking sector is structured. In a speech last night, entitled ‘Banking: From Bagehot to Basel, and back again’, the governor hit out at the global banking structure stating: “of all the many ways of organising banking, the worst is the one we have today”.
At the centre of the problem, Mervyn King argued that financial and economic crises, like the sub-prime crash in 2008, regularly occur when banks turn short-term borrowing into long-term loans. In his speech the governor suggested that we can no longer “countenance a continuation of as 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 guarantee.”
It appears that Mr King is still concerned about the risks that some executives and institutions take with other people hard earned savings and investments, but what are we do about it? Should we revolutionise the banking sector? Or should we just introduce a series of safeguards aimed at protecting the general public and let those institutions that want to gamble take whatever risks they want, but at their own cost and with no tax-payer funded safety net?
In recent months the international banking supervision committee BASEL, based in Switzerland, recently announced a new accord, providing a new international banking regulatory framework. The accord known as Basel III advocates tighter control of banks and financial institutions, insisting that each institution hold capital totalling 7% of their risk bearing assets. The idea of the capital-reserve is to provide the bank with a buffer should serious financial problems occur. However, in his speech the governor made it clear, that in his own opinion the accord did not go far enough.
Mr King described the Basel III accord as “a giant leap for the regulators of the world, it is only a small step for mankind.” He further added that “even the new levels of capital are insufficient to prevent another crisis… Only very much higher levels of capital – levels that would be seen by the industry as wildly excessive most of the time – would prevent such a crisis.” Clearly the governor feels that enforcing higher levels of capital is the first move in ensuring the prevention of another disastrous financial meltdown.
Although Mr King provided a number of policy ideas and initiatives on how to reform the system, he did not fully commit to one, or the other. Instead he suggested that the problems of the global financial system were complex and varied, he stated: “I have suggested a number of ways in which the system could be reformed. But making the right choice will take much careful thought and a good deal of time. So I do not want today to offer a blueprint.” In his final summation the governor said “I have explained the principles on which a successful reform of the system should rest. It is a program that will take many years, if not decades. But, as Bagehot concluded in Lombard Street, “I have written in vain if I require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all.”