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Saturday, October 24, 2009

Hutton: "Mervyn King is right"

by Calculated Risk on 10/24/2009 11:55:00 PM

From Will Hutton at the Observer: Mervyn King is right – the time has come to break up the megabanks (ht Jonathan)

Will Hutton reviews the competing proposals to reform the banking system and suggests a combination of the two ...

The first proposal, championed by BofE Governor Mervyn King and former Fed Chairman Paul Volcker is to break up the banks and separate the commercial parts from the "casino banking":

If the status quo is untenable and unfair because it leaves us with banks so big they have to be bailed out in a crisis, and if the proposed increases in bank capital advanced by the government are unlikely to act as a restraint, then there is only one course of action left: we have to break up the megabanks. The speculative, risky parts of banks must be separated from the commercial parts which lend to business, consumers and home buyers.

This, after all, is what the Americans did after the 1929-33 crash. Under the famous Glass-Steagall Act, commercial banks were forbidden to offer any form of collateral, underwriting or loan that financed stocks and shares. The same could be done today. The banking the economy needs – so-called narrow banking – could be closely regulated and casino banking could be left to its separate, freewheeling devices.
The second proposal, championed by Lord Turner in the U.K., and I believe favored by the Obama Administration in the U.S., is to have capital requirements based on the riskiness of the business:
The way forward, [Lord Turner] repeated, is more capital, especially more capital for the casino parts of any bank's business. On top, banks should make "living wills", setting out how they would wind themselves up without any cost to the taxpayer.
Either way - I think the time has for action.