Bank of England: Banking restructure needed

Wednesday 21st October 2009

The Bank of England head has warned reforming British banking through regulation is not enough, and the structure also needs reform.

Speaking in Edinburgh last night, governor of the Bank of England Mervyn King said the UK's banks remain "extraordinarily dependent on the public sector for support".

The UK government and G20 leaders want to regulate the banks to reduce the risk of further riskier practices, which contributed greatly to the global financial crisis. But Mr King said "the belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion".

He noted that UK banks are "highly concentrated" and that he would like to see more competition in the banking sector.

Mr King told Scottish business organisations: "The United Kingdom faces two fundamental long-run challenges. First, to rebalance the economy, with more resources allocated to business investment and net exports and fewer to consumption.

"Second, both the structure and regulation of banking in the UK need reform. Banks increased both the size and leverage of their balance sheets to levels that threatened stability of the system as a whole.

"They remain extraordinarily dependent on the public sector for support. That was necessary in the immediate crisis, but is not sustainable in the medium term."

However, the British Bankers Association (BBA) disagrees with Mr King's call for banking restructure. Chief executive, Angela Knight said: "The governor has long held this view. We believe the key issue is not one of breaking up banks but of financing the economy.

"We need to remember that although some important banks failed across the world, the majority did not. We need to build our future based on those banks which managed well, not treating them the same as those which failed."

Earlier today the banking sector came under fire after a thinktank said bonuses for 2009 were expected to be up 50 per cent, despite calls for them to be better regulated.

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