Mervyn King backs Obama-style bank reform over Brown's 'Tobin tax'

THE Governor of the Bank of England has warned that government "tinkering" with the banking system will not prevent another taxpayer-funded bail-out, saying President Obama's planned shake-up is the right way to go.

Mervyn King told MPs yesterday the UK's banking sector had become too big and that it was "not credible" to think otherwise.

In a fresh swipe at Gordon Brown, Mr King dismissed the Prime Minister's idea for an international levy – or "Tobin tax – on banking transactions, describing it as "the bottom of the list" of options for reform.

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Instead, he said that failing institutions needed to be broken up so that the contagion of last year's crisis could never happen again.

The governor's frank comments come as Labour ministers are still attempting to come to terms with the US plan to limit the activities of banks, seen as a step towards splitting investment banks and retail banks. The move is backed by the Tories but Mr Brown has focussed instead on plans for a global tax, claiming the idea was "gaining traction".

However, Mr King came down firmly on the side of the Obama plan yesterday, saying he welcomed the move to put "radical reform on the table".

"One way or another we have to reform the financial system," he added. Warning it was "very difficult" to handle failed banks which spanned the world, he said the "first step" was to "have a simple, clear, broad-brush approach to how we break up an international institution that failed".

"Of all the components of radical reform, I think a Tobin tax is bottom of the list. It's not thought to be the answer to the 'too big to fail' problem – there's much more support for the idea of a US-type levy."

The governor's comments were welcomed by the UK Treasury last night, with officials insisting they too backed the principal of radical reform to the banking sector.

However, City Minister Lord Myners has said the Obama plan is tailor-made for the "idiosyncratic problems" in the United States.

Mr King was speaking to the Treasury Select Committee in a debate about whether banks have become "too big to fail".