King accuses bankers of 'playing with fire'

Labour's poor regulatory system 'ignited the fuel' that led to the credit crisis

In an extraordinarily outspoken speech last night, the Governor of the Bank of England, Mervyn King, described the regulatory system framed by Gordon Brown in 1997 as "inadequate", claimed that wrongly incentivised bankers had been "playing with fire", and said that a central tenet of the Financial Services Authority's new approach was a "delusion".

Such failures had, suggested Mr King, meant that "we shall all be paying for the impact of this crisis on the public finances for a generation".

Close to £1 trillion of public money has been devoted to supporting the financial sector. Mr King called the sums "breathtaking" and "not sustainable in the medium term".

"Anyone 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.

"It is 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 said.

The current "tripartite" system of regulation was framed by Gordon Brown when he became Chancellor in 1997, at which point banking supervision was transferred from the Bank to the FSA. The basic architecture of the system has been recently reaffirmed by the Chancellor, Alistair Darling, while the Conservatives have said that they will return oversight of banks to the Bank of England.

Despite the risk that the Bank itself is being politicised by this controversy, Mr King laid into the Brown-inspired "inadequately designed regulatory system", which, he said, "ignited the fuel" that led to the conflagration that has engulfed the nation. Mr King added that "the past two years have shown how dangerous it is to let bankers play with fire", adding that "it is a matter of the incentives they face", pouring fuel of his own on to the debate about bankers' pay and bonuses.

Mr King also expressed thinly veiled contempt for the proposals made in the Turner review and the Treasury's White Paper on banking. He said that the structure and regulation of banking in the UK still "need reform" and called for a "serious review of how the banking industry is structured and regulated". The Governor did not so much as pay lip service to the chairman of the FSA, Lord Turner's review, or the White Paper. Indeed, Mr King explicitly ridiculed the notion, central to the Turner review, that increasing capital adequacy requirements on banks would be sufficient to deal with the widely acknowledged "too important to fail" problem. It is, said Mr King, "worth a try", but Mr King was still scathing – "the belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion".

Mr King repeated his call for a separation of so-called "utility banking", covered by a state guarantee to depositors, from other forms of investment banking. Such a system prevailed for many decades in the US under the Glass-Steagall Act, finally abolished in the 1990s, and, less formally, in the UK before the Big Bang reforms of 1986. He said that resolution of the issue was inevitable – "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".

Mr King said that there are now too few banks and that they yield too much market power, implying that they should be broken up. "By international standards UK banking is highly concentrated. There are four large UK banking groups. Of these four, two are largely in state ownership and their assets are a multiple of the assets of the next largest bank. As in the English premier league, getting into the top four will not be easy for those outside it."

Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
VIDEO
Sport
Australia's Dylan Tombides competes for the ball with Adal Matar of Kuwait during the AFC U-22 Championship Group C match in January
sportDylan Tombides was diagnosed with testicular cancer in 2011
News
Ida Beate Loken has been living at the foot of a mountain since May
newsNorwegian gives up home comforts for a cave
Extras
indybest10 best gardening gloves
News
Russia's President Vladimir Putin gives his annual televised question-and-answer session
peopleBizarre TV claim
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
Posted at the end of March, this tweeted photo was a week off the end of their Broadway shows
people
News
peopleStar to remain in hospital for up to 27 days to get over allergic reaction
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
life
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit