Bank of England backs "spirit of Obama's reforms"
The Bank of England today applauded President Obama's attempt to reduce the risks taken by banks that look after individuals' deposits.
In evidence to the Treasury Select Committee, Paul Tucker - a deputy governor of the Bank - said "I agree with the spirit of the president's proposals...It is the spirit that matters".
He then threw his weight behind what he believed President Obama was trying to achieve:
"Banks should be less risky businesses if they are going to be funded by insured deposits and if they are going to be highly leveraged".
What he meant was that there should be new constraints on the risk-taking activities of commercial banks, like Royal Bank of Scotland and Barclays, that look after the savings of millions of people.
Mr Tucker said that banks should concentrate on serving the interests of their customers and should not be "betting on the tos and fros of the market".
He and the Governor of the Bank of England, Mervyn King, said that the prospects for international agreement on the appropriate reforms for the bank system had been improved by President Obama's intervention.
Simply increasing the capital which banks have to hold, as a protection against future losses - which has been the thrust to date of protective measures forced on banks - was not enough, they said.
There needs to be structural changes to the banking industry, they added.
Strikingly - and in contrast to the positions taken by both the government and the Tory party - they said that if international agreement on the appropriate structural reforms could not be reached, the UK should take unilateral action.
However neither Mr King or Mr Tucker yet had a detailed blueprint for the necessary changes.
Mr Tucker said that limiting the size of banks, which is one of President Obama's proposals, would be helpful.
But he and Mr King said it would be premature to support the detail of President Obama's plans because there was not enough clarity on what he meant when he said that banks should be forced to withdraw from involvement in proprietary trading, hedge funds and private equity.
"No one has the faintest idea how to define proprietary trading" said Mr Tucker.
The ultimate aim of bank reforms, said Mr King and Mr Tucker, was to abolish both the explicit and implicit taxpayer guarantee against losses for institutions, companies and professional investors that lend to big banks.
It was crucial that providers of this so-called wholesale finance should be exposed to losses if banks ran into difficulties - because these lenders to banks could then deter banks from taking excessive risks.
However this taxpayer support could not be withdrawn rapidly, because to do so would almost certainly lead to a rapid and massive withdrawal of funding for banks - which would precipitate a second credit crunch and tip the world back into recession.
Mr King said that the banking industry had become too dominated by enormous institutions that strove to be in every activity and in every country.
The rise and rise of these vast banking conglomerates had increased the probability of the kind of catastrophic banking crisis that occurred in 2008.
Over the longer term, he wanted to see a much more diverse banking industry composed of smaller banks and more specialist banks.
Here's my 60 second summary for Radio 4 news of the significance of the evidence given to MPs today by the Bank of England
There is a small reason and a big one why it matters that the Bank of England has thrown its weight behind the spirit - if not the detail - of President Obama's plans to break up banks and limit their size.
First it aligns the Bank of England a bit closer to the Tories than to the Government on the future of banking.
And, more importantly, it confirms that Britain's central bank - which will take the lead on regulating and supervising banks if the Tories win the election - doesn't believe that the banking system has yet been made safe.
The Governor and his deputy want to see further restrictions on the risks that can be taken by banks that look after retail depositors' money.
They also believe companies and professional investors that lend to banks should no longer benefit from any kind of guarantee against losses provided by taxpayers - in the hope that these lenders would then keep banks on the straight and narrow.
Easier said than done, as they admit. Eliminating these guarantees right now could well trigger a banking crisis as bad as 2008's devastating debacle.