Britain needs a safer and more robust banking system, central bankers said on Tuesday, saying U.S. President Barack Obama's plans for a drastic bank sector overhaul were part of a much needed debate on how to fix the industry.
Obama's proposals, which sent a ripple through financial markets last week, showed that radical reform was on the table, Bank of England Governor Mervyn King said in testimony to lawmakers, and a range of different policy instruments was required.
"We do need a safer and more robust system … that may turn out to be smaller," King said. "The objective is to create a financial sector that provides the services that the non-financial sector needs."
Obama's aggressive plans to limit risk-taking in banks include limits on their exposure to hedge funds, private equity and proprietary trading, and capping their size.
It was essential that wholesale creditors to banks face possible losses, King said, rather than relying on an implicit guarantee governments would bail out banks because of their importance for the broader economy.
"Restricting size may be an ingredient, (but) I doubt frankly it will be sufficient to do it on its own," BoE Deputy Governor Paul Tucker said in a hearing before the Treasury Select Committee.
The Bank of England may stand to gain bank supervisory duties if the Conservative Party — which polls say is favourite to win a 2010 election — sticks to its plan to abolish the Financial Services Authority.
Politicians in Britain, France and Germany have welcomed the Obama's measures, which come amidst a public outcry over lavish bonuses only a year after excessive risk taking by banks brought the global financial system to the brink of collapse.
British banks had to be bailed out in hugely costly programmes last year, with lenders such as RBS <RBS.L> and Lloyds <LLOY.L> now largely state-owned, making the country one of the hardest-hit by the crisis in Europe.
Conservative George Osborne, expected to be Britain's finance minister if his party wins this year's election, has backed Obama's plans, as has Prime Minister Gordon Brown's ruling Labour Party.
