In These New Times

The dangerous consequences of New Labour’s massive bailout of the banks is causing some disquiet. As we have already noted King appears intent on protecting the pound, for whose value the Government seems to have a cavalier disregard. As UK PLC goes down we can expect more sparks to fly as the elite agenda starts to fragment.

This Is Money

18th June, 2009

Government policy on City regulation was last night thrown into deeper confusion by sharply contrasting speeches by Mervyn King and Alistair Darling.

Speaking at the annual Mansion House feast, Bank of England governor King called for a crackdown on large banks that accept deposits and also engage in risky investment banking activities.

He said it is ‘not sensible’ for such banks to operate casino-style trading operations and still enjoy implicit taxpayer support.

He implied such institutions may even have to be broken up, saying that if a firm is too big to be allowed to fail, then it is simply ‘too big’.

So-called ‘proprietary trading’ operations, in which a firm gambles its own capital to generate profits, may not belong in banks at all, King signalled.

He said: ‘It is not sensible to allow large banks to combine High Street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. Something must give.’

But at the same dinner Chancellor Darling advocated a far more laissez-faire approach.

Rebuffing Tory proposals to split up lenders such as Lloyds Banking Group and Royal Bank of Scotland, he said ‘it is not as simple, as some have suggested, as restricting the size of banks’.

Even small institutions can cause financial chaos, the Chancellor argued.

He said the ‘right way to deal with the big bank problem’ is to ensure the banks themselves put in their own internal plans to reduce risk.

Darling also struck a far more conciliatory tone in his speech. He told the assembled bankers that the financial sector remains ‘an immense asset to our country’, comprising 8% of gross domestic product.

While he advocated tougher regulation, Darling emphasised the key role in bank boards policing themselves, rather than the impetus being put on regulators. Rules requiring banks to boost their capital must be internationally coordinated, he said.

King was considerably harsher in his address. He said there had been a drastic loss of trust in the financial sector. The crisis in the City has ‘wreaked havoc’ on ordinary families, he said.