Bank of England chief Mervyn King calls for 'narrow banks'

Bank of England Governor Mervyn King called for ultra-safe "narrow" banks today in evidence to a cross-party commission on the future of the industry.

Mr King said the case for utility banks handling vital payments and retail deposit activities - backed by cast-iron assets - is "irrefutable".

He was giving evidence to the Future of Banking Commission, chaired by Conservative MP David Davis, which has been convened to draw the wider public into the debate over bank reform.

Mr King added that a long-term structure for the industry was needed, as well as "fire-breaks and firewalls" to protect the vital functions of the industry while leaving the riskier parts of the sector to fail in the market without an implicit state guarantee.

He said: "Our ability to sustain a large international finance centre depends on demonstrating not only to ourselves but the rest of the world that that centre does not rely on taxpayer guarantees.

"That is not a sustainable position for a large international banking centre."

The Commission will produce a report after the election, after taking evidence from a range of bankers, politicians, trade unions and business leaders.

Mr King said it was not good enough to "co-mingle" payments and deposits with riskier activities with the expectation of state support.

The governor said investors had been living in a "fool's paradise" and added: "What we can't carry on with is a system where the people providing the finance believe they are not taking any risk, but their money is being used for risky activities."

He also called for a long-term transition to a new structure for banking to reduce the risk of jeopardising a fragile economic recovery.

He said: "There is a risk that if reform is implemented too quickly, it could damage the recovery because the banking system would not be able to lend in a way that it otherwise would."

Mr King stressed the Bank's "three-legged stool" of reforms involving tougher capital requirements, arrangements which allow banks to fail safely, and changing the structure of the industry - as well as tools "which allow grumpy old men in central banks to take the punchbowl away".

He added that it was incumbent on officials and politicians to press ahead with reform before the next "even bigger" crisis struck.

"I do like to hope that we can get to the point where people will face up to the problems, difficult and unpleasant though they are."

Mr King said: "It would be desirable if we could have an international agreement... but I don't think we should succumb to the argument that we can do nothing without international agreement. That would be a mistake."