Paul Tucker, the frontrunner to become the next governor of the Bank of England, has told MPs he does not want to see the full separation of retail and investment banks.
Speaking to a parliamentary committee on banking standards, Tucker warned that even if the separation of banks was forced by law, the economy would still be at risk of being "blown up" by non-retail banks and other financial institutions.
Tucker said: "The thing that has worried me most about this debate from the beginning ... is that people fall into thinking, 'if only we could make retail banking safe, the financial system will be safe', and frankly I think that is nonsense. I think the financial system and the economy will be capable of being blown up by vast wholesale dealers and non-banks."
But he said any further delay to implementing reforms proposed by Sir John Vickers to "ringfence" retail banking could damage the economy. "We should get on with Vickers and I think it will be damaging in all sorts of ways, most importantly to credit conditions if there is a further prolonged period."
His comments reveal a split between him and the current governor, Sir Mervyn King, who has been pushing towards full separation for several years. King, who has seven months and eight days left of his term, said on Thursday: "I've always felt that total separation is the right way to go." He believes the government should implement the Vickers proposals now but said there should be an automatic review of the ringfence in the future to decide, "whether we need to go further".
He said the definition of the ringfence was not yet clear but that should come with secondary legislation. Clarity, he said, was crucial to avoid banks lobbying the regulator. "For the regulator to be effective, it has to be able to use judgment. But if judgment ends up simply as a negotiation between the regulator and the regulated bank, there's only one winner in that and I think that will be a very bad outcome."
The Bank of England's executive director for financial stability, Andy Haldane, said bank directors should ensure their bank is implementing the ringfence. But he said regulators should also police the ringfence and punish banks if they were found to be in breach of it, by requiring the bank to hold extra capital. Beyond that, he suggested the regulator should have the power to restructure the bank.
"The third rung on the ladder could be the possibility of vesting in the regulator a further sanction, which could be to require the reorganisation of the ring-fenced bank to ensure that the objective of the Vickers Bill – insulation of core services and continuity of those core services – was preserved."
Tucker noted that future EU law could allow the regulator to require banks to restructure so that they are "resolvable".
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