Sir Mervyn King vowed the Bank of England will prevent future financial crises by “taking away the punchbowl” from bankers.
The Bank is “up to the task” of resuming responsibility for regulating the City next year, its governor told the BBC Today Programme Lecture last night, and would step in to prevent lenders over-extending themselves again.
A new Financial Policy Committee (FPC) as part of the Bank will take control of regulating the City next year, but Sir Mervyn said further reform was “essential”.
He urged the Government to speed up rules to force banks to separate their retail and casino-style investment banking arms.
Sir Mervyn said: “The Bank’s new Financial Policy Committee will have the power to step in and prevent a hangover by taking away the punchbowl just as the party in the financial system is getting going.”
He added: “That won’t make us popular among bankers, politicians and even at times some of you, and it’s not supposed to. But it will, I hope, reflect the trust and confidence that the citizens of this country can place in the Old Lady of Threadneedle Street.”
He admitted the Bank had made mistakes and should have “shouted from the rooftops” that banks had been allowed to borrow and lend too much.
There had been a “failure of imagination” to appreciate that some of the biggest banks, such as Royal Bank of Scotland and Lloyds, could need a bail-out, partly because there had been no boom or period of high inflation to suggest a crash, he claimed.
He blamed light-touch regulation and said a decision to take away the power of regulation from the Bank in 1997 returned “to haunt us”. Sir Mervyn said we owe it to our grandchildren to reform the system further.
He said: “We don’t build nuclear power stations in densely-populated areas – nor should we allow essential banking services and risky investment banking activities to be carried out in the same ‘too important to fail’ bank.”