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Bank of England Governor Mervyn King today declared that banks which “screw it up should be allowed to fail” in his starkest warning yet to the industry.
He again called for banks deemed “too big to fail” or “too important to fail” to be broken up so they do not have to be rescued by taxpayers in times of crisis.
It came after the central bank revealed for the first time that now-nationalised banks Royal Bank of Scotland and HBOS were secretly kept afloat with nearly £62 billion of emergency loans last year.
Although the money has been paid back, King said the banking sector is still supported by the Government to the tune of “hundreds of billions of pounds”.
Clearly angry, he told MPs on the House of Commons Treasury Committee: “If banks screw it up and make bad decisions they should be allowed to fail.”
The Governor urged regulators to take a tough stance with banks to make sure their business models never again put the taxpayer or the economy at risk.
King said: “Regulators have to be tough enough on banks to say we don't believe your structure is simple or small enough for us to be able to allow you to fail, therefore you must change the way you organise your activities.
“We cannot end up with a situation where any regulator feels or any government feels that any institution is too important or too big to fail. That has to be the single most important objective now.”
He called for the structure of banks to be simplified and for them to hold more capital to act as a buffer against future losses. King also said “living wills” were needed so if a bank hits trouble it can fail in an orderly fashion.
It came as Adam Posen, a member of the Bank's monetary policy committee, indicated that he thought quantitative easing should be in its closing stages.
The Bank this month extended the programme by £25 billion to £200 billion to breathe life into the ailing economy but many in the City think that is enough.Posen said: “The hope is we are coming to the end of large-scale quantitative easing.”
King said the stimulus package would take two to three years to reverse. He forecast “pretty buoyant growth rates in the short-run”. However, King also warned that “for the forseeable future” the level of economic output will be “well below the level” we expected before the crisis.
Reader views (4)
Are you related to Jack Straw? Hindsight wonderful! Guts to lead and do something not on your Nelly mate. Your comments are not worth tuppence of cold breath. Go get a real job without a gold plated pension, life will look completely different.
- Mike, London, 25/11/2009 18:49
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I wholly agree with Mr King that no institution should ever be allowed to achieve the status of being too important or too big to fail. That includes the Bank of England whose secret loans to banks and incontinent programme of Quantative Easing has burdened all of us with inordinate debts without our say so. Carry on sinking Mervyn.
- James Elliott, Eastborne UK, 24/11/2009 19:22
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There are so few banks left now that its impossible to let them fail, just like there are too few top law firms and too few big accountantcy firms - so much for the OFT.
- Andy Davids, London, 24/11/2009 19:06
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Mr King hatched the rescue and seems bent on rescue despite his threats instead of re-shoeing the thing break it up. Give the TSB back to the people and restart this economy with a coalition government that is stress tested before office, and please not by psychologists........
- Grumpy From Devon, UK, 24/11/2009 14:24
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