The governor of the Bank of England (BoE) has proposed a radical overhaul of the banking system, saying the BoE should be given new powers and banks should be made to draw up wills in case of a crisis.
BoE head Mervyn King, addressing business leaders in London late on Wednesday, said change to the structure, regulation and culture of the banking system was necessary to rebuild trust in the financial sector.
King said methods to help ensure financial stability needed “sharpening and refining,” adding: “We have a real opportunity now to put that right and regain the trust that’s been lost.”
King suggested that every regulated bank should be required to produce a plan for the “orderly wind-down of activities.”
The BoE governor added: “Making a will should be as much a part of good housekeeping for banks as it is for the rest of us.”
Hinting that the BoE was not being handed enough power by government to help bring about change, King likened the BoE to a church, which sees its congregation at important events but is ignored in the interim.
“It is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organize burials,” the governor said.
King meanwhile said that there were signs the British economy was “beginning to stabilize,” although he warned the road to full recovery was likely to be long.
“There are some signs that the British economy is beginning to stabilize, and financial markets have improved markedly,” King said, adding that “a recovery in activity was likely to occur at some point this year.”
But he warned: “There are some equally solid reasons for believing that the path to full recovery could be protracted.”
He said bank lending remained constrained, partly because banks were struggling with low levels of equity capital.
British finance minister Alistair Darling, speaking at the same event, urged big changes to banking boards, blaming their poor judgment for the financial crisis that dragged the world into a downturn.
Darling said there was a need to strengthen the regulatory system and banking culture.
“All of us need to learn lessons and I believe this process has to begin in the boardroom,” he said.
Darling said transparency and openness were “absolutely paramount” in the financial system, and stressed that banks must not take risks on complex investments in the pursuit of profits.
“We need a change of culture. Bank boards must have the right people, skills and experience to manage themselves more effectively ... Their focus must be long-term wealth creation, not short-term profits,” he said.
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