King tells banks they will have to be broken up

(Getty Images)

The battle over the future of banking witnessed another skirmish yesterday as the Governor of the Bank of England, Mervyn King, and the chief executive designate of Barclays, Bob Diamond, clashed over tougher rules.

At a financial conference in New York, Mr King said that there remained a case for breaking up the big banks, and that "of all the many ways of organising banking, the worst is the one we have today".

New international rules, the Basel III regulations, were, Mr King said, only a starting point and "Basel III on its own will not prevent another crisis".

The Bank of England, added Mr King, would look at more "radical" reforms. He floated once again "limited purpose banking", where a bank is little more than a safe-deposit box – a notion which is regarded as anathema by the bulk of the banking industry.

More realistically, Mr King once again voiced his support for the separation of banking activities, where deposits guaranteed by government were separated from more risky activities.

But at the Confederation of British Industry's annual conference, the chief executive designate of Barclays, Bob Diamond, rejected the idea that national regulators should augment the Basel rules, arguing for an international "level playing field". Consistent rules would, he said, ensure that businesses based in Britain were not put at a disadvantage. "I understand why there is calls for UK banks to share the tax burden, but if it makes it more difficult to compete on equal terms with the best banks in the world, it will hamper our ability to support the UK economy," Mr Diamond added. On bonuses, he said Barclays would "balance our responsibility to manage pay with the need to be commercial and competitive".

Antonio Horta-Osorio, the chief executive of Santander, said that regulators must "tackle the excesses of the financial system without damaging the system and the competitive advantage of the UK".