King says bank break-ups may be answer

13:53, October 22, 2009      

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Bank of England Governor Mervyn King stepped up his call for governments to tackle the dangers posed by banks that are "too important to fail", saying new capital rules won't shield taxpayers from funding any future bailouts.

"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," he said in a speech in Edinburgh.

He indicated that one solution could be to split up banks and separate riskier activities from more stable businesses such as taking deposits.

Officials are debating how to rein in the world's biggest banks after their near-collapse threatened to capsize the global economy.

While King also said more stringent capital rules wouldn't necessarily create a safety cushion large enough for banks to weather every crisis, his stance was at odds with that of Chancellor of the Exchequer Alistair Darling.

"Capital requirements reduce, but not eliminate, the need for taxpayers to provide catastrophe insurance," King said.

He added it is "hard to see why" proposals such as those of former Federal Reserve Chairman Paul Volcker to separate proprietary trading from retail banking are "impractical".

By contrast, Darling said focusing on capital rules may be enough to ward off future crises and is unswayed by arguments that banks should be broken up.

"You regulate according to risk," Darling said before King's speech. "The greater the risk, the greater the capital requirement. I don't think an arbitrary split would deal with the problem."

Source:China Daily
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