{"id":8344,"date":"2009-10-21T13:54:54","date_gmt":"2009-10-21T17:54:54","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=8344"},"modified":"2009-10-21T13:54:54","modified_gmt":"2009-10-21T17:54:54","slug":"tussle-in-uk-over-banks-may-influence-future-regulation","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=8344","title":{"rendered":"Tussle in UK over Banks May Influence Future Regulation"},"content":{"rendered":"

Mervyn King of the Bank of England has inserted himself into the bank regulation debate<\/a>:<\/p>\n

Bank of England Governor Mervyn King opened a rift with Prime Minister Gordon Brown\u2019s government by signaling the biggest banks could be broken up to prevent taxpayers having to shoulder the cost of future bailouts.<\/p>\n

King\u2019s suggestion to separate investment banks from operations that take deposits from consumers and manage payment systems was ruled out by Chancellor of the Exchequer Alistair Darling as recently as yesterday.
…<\/b>
\u201cThe key issue is not one of breaking up banks but of financing the economy,\u201d Angela Knight, chief executive officer of the British Bankers\u2019 Association, said in an e-mail. \u201cBig businesses may want big banks which offer a range of products and services while individuals may look to something smaller. Large universal banks are the way forward.\u201d<\/p>\n

The G-20, whose finance chiefs meet in two weeks for talks in Darling\u2019s native Scotland, is focusing on pushing banks to raise capital and restrain pay rather than devising an international approach to curbing the size of banks. Darling is writing laws to make banks write a \u201cliving will\u201d that enables a quick wind-down of institutions that fail.
…<\/b>
King said yesterday that, while global efforts to bail out banks had prevented economic disaster, they had created \u201cpossibly the biggest moral hazard in history.\u201d He said that it is \u201chard to see why\u201d proposals such as those made by Volcker to separate proprietary trading from retail banking are \u201cimpractical.\u201d<\/p>\n

\u201cWhat does seem impractical are the current arrangements,\u201d King said. \u201cAnyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly. But that is where we are now.\u201d<\/p>\n

Brown, Darling and other ministers have repeatedly said such a split would have failed to prevent the collapse of Lehman Brothers Holdings Inc. or Northern Rock Plc.<\/p><\/blockquote>\n

King’s remarks put him somewhat at odds with the US Treasury, which wants separation based on size, not function<\/a>.<\/p>\n

Assiduous Readers will remember that I prefer separation of function based on parallel regulation, in which institutions that consider themselves banks would be, by differentiation of risk-weighting, encouraged to buy-and-hold long term assets. Institutions opting to be regulated as brokers would be discouraged from buy-and-hold investing. I greatly prefer this to be done by means of risk-weighting than by flat prohibitions, because sharp lines between asset classes and investment styles increase systemic cliff risk.<\/p>\n

Note that I similarly believe that Canadian banks’ insurance operations should be penalized via risk-weighting; Canada’s current policy<\/a> on bank-owned insurers is just plain dumb.<\/p>\n

It was buy-and-hold arbitrage that brought down the dealers; it was excessive funding risk, combined with poor credit quality that brought down Northern Rock.<\/p>\n","protected":false},"excerpt":{"rendered":"

Mervyn King of the Bank of England has inserted himself into the bank regulation debate: Bank of England Governor Mervyn King opened a rift with Prime Minister Gordon Brown\u2019s government by signaling the biggest banks …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[],"class_list":["post-8344","post","type-post","status-publish","format-standard","hentry","category-regulation"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/8344","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=8344"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/8344\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=8344"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=8344"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=8344"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}