New global rules on the amount of capital banks must hold are insufficient to avert another banking crisis and financial regulatory reforms should be more radical, warns Mervyn King, the governor of the Bank of England.
During a speech in New York yesterday, King said policymakers should look at demanding capital levels much higher than the 7% requirement for Tier 1 capital reserves demanded by Basel III. He said: “Basel III on its own will not prevent another crisis.”
King dismissed worries that nine years was too fast a timetable to implement the new rules.
He also raised concerns about the implementation of the government’s banking levy announced in last week’s comprehensive spending review. (article continues below)
He said: “How can we be certain of correctly establishing what the tax should be when we are trying to internalise costs that occur so infrequently? So although there is a sound case for a levy directed at the size of short-term borrowing, it would be foolish to regard that as the main tool to align costs and benefits of risky balance sheet activity.”
Other reforms he suggested were needed include splitting banks into deposit-taking and investment institutions and requiring the use of debt instruments that left creditors more exposed when things went wrong.