By Simon Miller
The governor of the Bank of England Mervyn King has renewed his call for big banks to be split.
Unveiling the latest BoE Financial Stability report, King refused to be drawn into discussions over individual banks or their leadership following the Libor manipulation and the mis-selling of interest rate derivatives to small business.
However, he repeated his call for the separation of retail banking operations and the implementation of the Vikers report into baking.
He commented: “The idea that the culture of investment banking is the same as the culture of basic banking, I have been arguing for several years and I think it is very clear now that those two cultures are completely different, and they need to be separated.”
King added: “So we need to implement the Vickers reforms, the government has brought that forward, we will see very soon the actual proposed legislation and I would urge parliament to pass that as soon as possible.”
The governor added that the “casino-banking” mentality of investment operations must not infect the retail side of banks and to ensure that “if the trading mentality leads to practices that we regard as rather unacceptable that it does not impinge on the part of the banking system about which we really care”.
King continued: “It is very important to recognise that as a society we really do want to underpin retail deposits, lending to households and SMEs. But we do not want to underpin people's decisions to take risky portfolio investments, therefore the two should not be on the same balance sheet.”
The Financial Stability Report recommended that the Financial Services Authority worked with banks to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the currently heightened risk of losses.
“That cushion may temporarily be above that implied by the official transition path to Basel III standards and would support additional lending to the real economy, including via the planned ‘funding for lending’ scheme. Banks should continue to restrain cash dividends and compensation in order to maximise the ability to build equity through retained earnings,” it said.
The report also found that the outlook for financial stability has deteriorated, particularly in light of heightened uncertainty about how, and when, euro-area risks will be resolved.
Although, major UK banks’ exposures to the most vulnerable economies’ sovereigns and banks were low, their exposures to non-bank private sector borrowers in many of these countries were significantly larger.
“Banks in other EU countries are also exposed to vulnerable euro-area countries. If contagion spread, significant disruption would be likely through secondary channels, such as counterparty risk, funding market stresses and feedback from macroeconomic weakness,” the report noted.