The Governor of the Bank of England has said Britain will have to give up its leading position in financial services unless the UK’s “too big to fail” banks can go bust without putting the taxpayer at risk.
The City would have to shrink if the Government were to come to the rescue of banks in a future crisis, Mark Carney has warned.
“If we don’t end ‘too big to fail’, we can’t support a financial sector of this size,” he said.
Despite the fact that the financial services industry accounts for 10pc of national output, UK banks have assets equivalent to about four times the size of the economy, employing around 1m people.
By 2050, banks assets could be nine times the size of UK GDP if “UK-owned banks’ share of global banking activity remains the same”, Mr Carney said.
“Some would react to this prospect with horror… but, if organised properly, a vibrant financial sector brings substantial benefits. The UK’s financial sector can be both a global good and a national asset – if it is resilient.”
To get there, he called for greater co-operation between national supervisors to prevent “regulatory Balkanisation” caused as countries put their own interests first. Failure to strike an international accord on financial regulation would threaten London’s competitiveness as a global financial centre, he warned.
The Bank had overhauled its liquidity rules to ensure the real economy was never again starved of lending in a financial crisis, the Governor also revealed. He assured that banks and building societies would have low-priced and abundant access to liquidity even if markets seized up, as they did during the 2008 credit crunch.
“Five simple words describe our approach – we are open for business,” he said. The Bank has reformed Britain’s “sterling monetary framework” to prevent banks from hoarding unproductive cash and gilts that could otherwise be released for lending to households and businesses.
“We are changing how we backstop private firms’ liquidity management,” Mr Carney said, after giving a speech in London. “These efforts will help set the stage to improve further the supply of credit within the UK.”
In 2008, a scarcity of liquidity forced banks into emergency asset sales that degenerate the crisis by setting off a downward spiral in prices. Since then, regulators have brought in tough liquidity rules but banks have built up even larger buffers – tying up funds.
The Bank relaxed its regulations in June to release as much as £70bn of liquidity to help boost lending and drive economic growth. The most recent change will guarantee lenders can be confident that they will always be able to access cash and gilts.
To build the fresh arrangements striking to lenders, the Bank has removed the “stigma” of liquidity assistance by cutting the fees and approving to accept lower quality loans as collateral.