Mervyn King warns banks will attempt to circumvent reforms

Sir Mervyn made his claim giving evidence to the parliamentary Banking Commission set up by Prime Minister David Cameron to look into the question of banking standards and ethics.

And the Governor and his deputy Paul Tucker, tipped to be named as Sir Mervyn’s successor next month, both pressed the government to “get on” with introducing the reforms produced by the committee headed by Sir John Vickers and not change them.

They said the reforms were needed quickly to “provide certainty for the banks”.

Sir Mervyn told the commission that the culture of banking had changed since the crisis in 2008 which led to the royal Bank of Scotland and Halifax Bank of Scotland being bailed out, but he warned that bankers would attempt to get round changes to the system including the ring fencing of retail banks to protect them from the investment casino banking arm.

Sir Mervyn told the commission: “The economics of merchant banking has changed enormously and that will change the culture, but that should not stop any move towards separation [of retail and investment banking].”

But he claimed that 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.

He said: “If the judgment turns into a negotiation there will be only one winner.”

And he warned that there was a risk that bankers would be able to “pull the wool” over the eyes of watchdogs.

He added that there needed to be clarity over what ringfencing means for the regulators to act properly.

“As a regulator, my experience would be that I would place as much weight as possible on the clarity. I would be worried if the definition of the ring-fence were left to the regulator to decide,” he told the commission.

Sir Mervyn called for a fixed date in the future when the Vickers reforms could be reviewed with the threat of further legislation to completely separate the two sides of banking.

He said: “I would like it set up in such a way that whatever came out of this there is a mechanism for reviewing - an automatic mechanism for reviewing the ring-fence and whether it’s working - which can’t be dodged or pushed into the long grass.”

The Governor also warned MPs and peers on the committee chaired by Tory MP Andrew Tyrie that the Vickers reforms would not prevent a bank from being bailed out again.

He was also critical of the government for altering the Vickers proposals particularly on the capital leverage ratio for banks.

He said: “Vickers proposed that leverage would be restricted to 25:1, the current legislation says 33:1. For my taste, 33:1 is much too high, but it’s a matter of measurement. If you asked me, I’d go back to the original Vickers proposal.”

He described Vicker’s commission as being made up of “very impressive individuals who thought about what needed to be done” and whose reforms should be accepted in full.

But Sir Mervyn also made it clear he does not want the Bank of England’s powers to be extended to enable it to break up banks.

He said Parliament alone should have the power of demanding the formal, legal separation of investment and retail.

“This is another power I do not want to receive,” he said.

There was disagreement between Sir Mervyn and his likely successor Mr Tucker over full separation of retail banks from casino banks, which is Sir Mervyn’s preferred long term goal.

Mr Tucker said that full separation would not guarantee the system from another banking failure.

He said: “Even if we were to go to full separation, the challenges of culture in retail banking stem in part from infection from investment banking but I don’t think they arise entirely from that. There’s been an industrialisation of high street banking.

“They’ve drifted away from relationship banking, branch managers are much less empowered than they were 20 or 30 years ago and that is a major problem of culture change in its own right - irrespective of what happens to global investment banking.”