Bank Governor Mervyn King said banks would be able to get around the new rules, designed to prevent taxpayers being landed with another colossal bailout bill, if the interpretation of the separation depended on negotiations between the banks and the regulators.
“If the judgment turns into a negotiation there will be only one winner,” King told the Banking Standards Commission.
King added that there was a risk that bankers would be able to “pull the wool” over the eyes of watchdogs. The Governor also backed the commission in its tussle with Chancellor George Osborne on whether it should be shown the proposed legislation by the Treasury so it can properly evaluate whether a ring-fence would make the sector safer.
“I think you should ask to see it,” he told chairman Andrew Tyrie.
Andy Haldane, the Bank’s director of financial stability, backed the Governor’s call for clarity on the ring-fence and added that legislators should not be swayed by warnings from bank lobbyists that tougher regulation would cut off lending and harm the economy. “We must not be held hostage in doing the right thing [out of fear] that banks will be stop lending,” he said.
King called for an automatic Parliamentary review of the ring-fence “in three, four, five years” to ensure banks are not “burrowing under” the fence, rather than merely relying on the regulator to take the initiative if it believed there were abuses taking place.
He argued this would place too much power in the hands of regulators. “We’re always being told that the Bank of England is too powerful. This is another power I do not want to receive,” he said.
King said he had originally favoured a total separation of retail and investment banking but added he had been persuaded of the merits of the ring-fencing approach advocated by Sir John Vickers’ Independent Commission on Banking.
Vickers said ring-fencing was preferable to a total separation because it would enable a non ring-fenced investment entity in a banking group to inject money into a ring-fenced retail institution that got into trouble. “That has some weight for me,” King said.
Paul Tucker, the deputy governor and the bookies’ favourite to be named as the successor to King next month, said the idea that full separation of banks would make the financial system safe was “nonsense”.
The economy could still be “blown up” by the failure of investment banks or the shadow banking sector he said. Tucker added the priority should be to enact the ring-fence in law without delay. “I absolutely agree that we should get on and do Vickers,” he said.