Mervyn King Interview Highlights the Problems With a Banking Sector Not Operating Under the FDR Framework

Over the last week, the Telegraph has run four interesting articles featuring Mervyn King's observations about the current state of the UK banking system and the financial crisis.  Regular readers of this blog will immediately see how adoption of the FDR Framework would address his concerns (for new readers, please click on the 'FDR Framework' under 'about this blog' and then come back and read this post).

The first article featured only quotes:

"The balance sheets of too many banks were an accident waiting to happen. For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary - indeed absurd - levels of leverage represented by a heavy reliance on short-term debt."

(King on the risks taken by banks before the financial crash)

"The biggest moral hazard in history."

(King on how the bail-out has encouraged future risk-taking by banks)

The second article reports on an interview with him,

... In the interview, the Bank Governor says: “We allowed a [banking] system to build up which contained the seeds of its own destruction. 

“We’ve not yet solved the 'too big to fail’ or, as I prefer to call it, the 'too important to fail’ problem. 

“The concept of being too important to fail should have no place in a market economy.” 

When asked whether there could be a repeat of the financial crisis, Mr King says: “Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again.” 

The third article offers rebuttals to the points that he made during his interview,

... But leading economists, including a former Tory advisor and the chief executive of the British Bankers' Association, have criticised his comments. 

Tim Congdon, who served on the Treasury Panel of Independent Forecasters (the so-called "wise men") under the last Conservative government, called the remarks "unjustified". 

... "If you criticise the banks you reduce their credibility and then people worry about them. The important thing for the Governor of the Bank of England is to help them." 

Angela Knight, chief executive, British Bankers' Association, said:  

..."The changes from top to bottom within the industry have ensured the risks are well controlled, and all banks have put recovery and resolution plans in place to answer the too-big-to-fail question and so safeguard customers and the taxpayer against the remote consequences of any future failure."

And finally, a column supporting Mervyn King and the issues he raises:

... Mervyn King, has been conveying to our great bankers a profound criticism of how they behave and the system which permits them. They do not seem to care. Bob Diamond, of Barclays, even thinks that the "time for remorse is over". 

... [According to Mervyn King] banks ... decided that it was all right to "bet with other people's money", and to exploit the "gullible". They created all sorts of instruments just for playing the casino (he uses that word) with one another, and ended up with trust breaking down. So the system collapsed. 

But then came the "too big to fail" problem. We couldn't let the banks collapse because they would bring us all down. In 2008-9, we performed an appalling, but necessary rescue. And now it could very well happen all over again! 

Banks which we, the taxpayers, rescued are doing the same business once more, and paying themselves the same piles of money, because they still have no "downside" risk. 

Mr King wants the independent banking commission to solve this: "The concept of being too important to fail should have no place in a market economy." 

Is the Governor right? Central bankers, as well as big bankers, did not cover themselves with glory. 

... Too many current attacks on bank bonuses miss the point. There is no "right" amount of money. 

... So we still have a fragile financial system. 

Worse, the basis on which we accept our economic arrangements is undermined. ... the credit crunch came and "surprise, surprise, the institutions bailed out were those at the heart of the crisis". Greed and foolishness were rewarded and prudence was punished. Eventually, people will not accept this. 

Why are those in power finding this so hard to handle? Partly, it is for good reasons. We want to maintain a banking system. Many bankers are conscientious and able people. We do not want a panic. 

But there are worse reasons.  

... our "zombie" banks, which are kept alive only by the taxpayer, ... power lies not in the good they can do, but in the havoc they could wreak. 

... It is objected that Britain must be a "global player", and that we must not let our banking talent disappear. But the trouble is, as Mervyn King has said elsewhere, that great international banks are "global in life, but national in death". 

These huge, smelly, sick dinosaurs are now squashing ordinary British citizens. I find it hard to believe that many other countries are longing to take the weight of this risk upon themselves. 

In some ways, our banking problem is even worse than our trade union one 30 years ago, because of the lure of money. Most powerful people in the country – especially in London – have a strong motive to suck up to the big banks. ... I'm glad someone is speaking up against a world where morality has simply turned upside down.