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| Mervyn King attacks 'absurd' bank risk | Mervyn King attacks 'absurd' bank risk |
| (40 minutes later) | |
| Bank of England Governor Mervyn King has attacked the 'absurd' level of risk taken on by banks in a speech. | Bank of England Governor Mervyn King has attacked the 'absurd' level of risk taken on by banks in a speech. |
| He called the banks' reliance on short-term debt to meet funding needs in 2008 an "accident waiting to happen". | He called the banks' reliance on short-term debt to meet funding needs in 2008 an "accident waiting to happen". |
| He said that, in future, banks must be forced to rely much more on equity to finance their risky activities. | He said that, in future, banks must be forced to rely much more on equity to finance their risky activities. |
| His comments raise the prospect that big UK banks will be required to hold significantly more equity than new international rules require. | His comments raise the prospect that big UK banks will be required to hold significantly more equity than new international rules require. |
| In order to do this, the banks might have to issue new shares, pay out less profits as dividends, or ration new lending more tightly. | In order to do this, the banks might have to issue new shares, pay out less profits as dividends, or ration new lending more tightly. |
| Tighter rules | Tighter rules |
| In September, the Basel international committee of bank regulators raised the minimum ratio of equity that banks must hold to absorb losses on loans and other risky investments from 2% to 7% of assets. | In September, the Basel international committee of bank regulators raised the minimum ratio of equity that banks must hold to absorb losses on loans and other risky investments from 2% to 7% of assets. |
| However, the committee said that even higher ratios were to be agreed for the biggest banks whose failure would pose a risk to the financial system. | However, the committee said that even higher ratios were to be agreed for the biggest banks whose failure would pose a risk to the financial system. |
| And individual regulators - such as the Bank of England - are free to set even higher standards if they choose. | And individual regulators - such as the Bank of England - are free to set even higher standards if they choose. |
| The Swiss announced higher capital ratios for their two biggest banks earlier this month. | The Swiss announced higher capital ratios for their two biggest banks earlier this month. |
| 'Achilles heel' | 'Achilles heel' |
| Mr King said that the new Basel minimum capital ratios were inadequate to address the problem of banks that are too big too fail, such as Barclays, HSBC and RBS. | Mr King said that the new Basel minimum capital ratios were inadequate to address the problem of banks that are too big too fail, such as Barclays, HSBC and RBS. |
| Such banks, he said, enjoy an implicit guarantee, which gives them an incentive to take on excessive risks. | Such banks, he said, enjoy an implicit guarantee, which gives them an incentive to take on excessive risks. |
| He also said that the coalition government's proposal for a bank levy - which is expected to raise £2.5bn a year - would be nowhere near enough to cover the losses of a future financial crisis. | He also said that the coalition government's proposal for a bank levy - which is expected to raise £2.5bn a year - would be nowhere near enough to cover the losses of a future financial crisis. |
| "The balance sheets of too many banks were an accident waiting to happen," he said, referring to the 2008 financial crisis. | "The balance sheets of too many banks were an accident waiting to happen," he said, referring to the 2008 financial crisis. |
| "For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary - indeed absurd - levels of leverage represented by a heavy reliance on short-term debt," said Mr King. | "For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary - indeed absurd - levels of leverage represented by a heavy reliance on short-term debt," said Mr King. |
| "The broad answer to the problem is likely to be remarkably simple. Banks should be financed much more heavily by equity rather than short-term debt. Much, much more equity. Much, much less short-term debt." | "The broad answer to the problem is likely to be remarkably simple. Banks should be financed much more heavily by equity rather than short-term debt. Much, much more equity. Much, much less short-term debt." |
| He claimed a future crisis could only be averted by requiring capital levels that would "be seen by the industry as wildly excessive most of the time". | He claimed a future crisis could only be averted by requiring capital levels that would "be seen by the industry as wildly excessive most of the time". |
| He expressed scepticism about the idea that banks could calibrate their borrowings depending on the riskiness of their investments. | |
| "If only banks were playing in a casino, then we probably could calculate appropriate risk weights," he said. "Unfortunately, the world is more complicated." | "If only banks were playing in a casino, then we probably could calculate appropriate risk weights," he said. "Unfortunately, the world is more complicated." |
| Mr King was speaking at the Buttonwood Gathering - a conference of economists in New York arranged by the Economist magazine. | Mr King was speaking at the Buttonwood Gathering - a conference of economists in New York arranged by the Economist magazine. |