In an exclusive article for The Herald, which comes after his hard-hitting speech in Edinburgh last night, he warns sweeping reform of the UK financial system is “essential” so future generations will “not suffer an even greater crisis” than that which tipped the economy into deep recession.
His call for reform comes at a time of increasing public fury over the resumption of big bonus payments and golden hellos for investment bankers. The investment banking sector was at the heart of the global financial crisis.
In his article, King ratchets up his campaign for reform of the structure and regulation of the banking sector, declaring: “Having banks that operate on the assumption that they will receive taxpayer support if things go wrong is simply inconsistent with their being in the private sector.”
And King highlights the extent to which the economy in Scotland, and the rest of the UK, is suffering from the fall-out from banking sector “failures” noting that “some of Scotland’s oldest and most proud financial institutions have been brought to their knees”.
He proposes as one option the separation of risky “casino” activities, such as investment banking, from “utility” services such as providing people with bank accounts and lending to households and companies.
Such separation has been opposed vehemently by banking chiefs, and the Treasury has shown little sign of embracing the idea. King highlights the “breathtaking” scale of taxpayer support given to the UK banking sector. He notes that direct or guaranteed loans and equity investments offered to UK banks total nearly £1 trillion -- around two-thirds of the UK economy’s entire annual output.
His article follows a keynote speech last night in Edinburgh, scene of the near-collapse of Royal Bank of Scotland and HBOS, in which he hammered home the case for banking sector reform.
King, who is on a visit to Scotland this week with his colleagues on the Bank’s nine-strong Monetary Policy Committee, told his audience last night: “To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”
In his article in The Herald, King cites as another option regulatory reform to minimise the likelihood of collapse of banks deemed too big or important to fail, thus reducing the need for the public sector to step in.
However, he highlights difficulties with this approach in terms of deciding which banks are too important to fail and notes that past experience suggests no amount of detailed regulation will be sufficient to ensure banks cannot fail. In his speech, he hammered home potential benefits from separation of casino and utility banking, while acknowledging this did not resolve “all misaligned incentives” dictating bankers’ behaviour.
In The Herald today, King writes: “Whatever the path we choose, we must move away from the world where banks can take gambles, safe in the knowledge that they will be guaranteed by the government. That is the challenge facing us … Solving the ‘too important to fail’ problem must be central to that.”
He adds: “It is clear that Scotland, as the rest of the UK, is suffering from the consequences of banking failures. That is why it is essential to reform the structure and regulation of our financial system so that future generations will not suffer an even greater crisis.”
Speaking in Edinburgh last night, King said author Sir Walter Scott would have been “mortified” by the troubles at Royal Bank of Scotland and HBOS. Royal required a £20bn capital injection from the taxpayer. The taxpayer meanwhile put up £17bn in support of Lloyds TSB’s rescue takeover of Edinburgh-based HBOS.
King noted that, writing in 1826 under the pseudonym of Malachi Malagrowther, Sir Walter had observed: “Not only did the Banks dispersed throughout Scotland afford the means of bringing the country to an unexpected and almost marvellous degree of prosperity, but in no considerable instance, save one [the Ayr Bank], have their own over-speculating undertakings been the means of interrupting that prosperity”.
King said: “Two years ago, Scotland was home to two of the largest and most respected international banks. Both are now largely state-owned. Sir Walter Scott would have been mortified by these events.
“Banking has not been good for the wealth of the Scottish and, it should be said, almost any other nation recently. Over the past year, almost six million jobs have been lost in the United States, over 2.5 million in the euro area, and over half a million in the United Kingdom. Our national debt is rising rapidly, not least as the consequence of support to the banking system. We shall all be paying for the impact of this crisis on the public finances for a generation.”
King declared banks “remain extraordinarily dependent on the public sector for support”, and said: “That was necessary in the immediate crisis, but is not sustainable in the medium term.”
He added: “Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.
“That is what economists mean by ‘moral hazard’. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history.”
King declared it was “important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place”.
He added: “The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the ‘too important to fail’ question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”
King also warned that “we should be under no illusion that the path to a sustained recovery will be smooth and painless”.
