Break up the banks

How long will taxpayers allow banks to take so much risk with their money?

By Jim J. Jubak Oct 21, 2009 12:25PM

Jim JubakFinally, someone with real power in the current financial world has stated the obvious: The world's big banks need to be broken up into utilities that do what you and I think of as banking, and speculative trading companies that take risky bets on the markets with their own money.


The speaker of such truths: Mervyn King, Governor of the Bank of England.


Proposed market reforms, including rules that would require banks to raise more capital, don't address the basic danger posed by banks that are too big to fail, King said in a speech on October 20 in Edinburgh. 


Requiring banks to keep more capital wouldn't create a big enough margin of safety as long as big banks were free to engage in unlimited risk-taking with the expectation that taxpayers would pick up the tab for any losses large enough to endanger the financial system.


King echoed recent comments from former Federal Reserve chairman Paul Volcker, who now serves as an advisor to the Obama administration. Volcker has called for separating retail banking from trading units that risk the bank's own capital in the markets.


King's speech puts added pressure on British Prime Minister Gordon Brown to deliver promised regulation that would require banks to write living wills that regulators would use to wind down a bank if it faced bankruptcy.


And King's words actually stand some chance of changing government policy. The United Kingdom is in the midst of an election campaign that's like to turn Prime Minister Brown's Labor government out of office. The Conservative Party, currently in the lead in polling, picked up on King's remarks to criticize the government's policies during the crisis.


Here's my favorite line from King's speech: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”


Can't ask for anything clearer than that.


Over to you in the United States, Chairman Bernanke and Secretary Geithner.


Read more from Jim on banking industry regulation. 

2Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
267
267 rated 2
467
467 rated 3
605
605 rated 4
645
645 rated 5
691
691 rated 6
617
617 rated 7
459
459 rated 8
313
313 rated 9
130
130 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.