Mervyn King, the governor of the Bank of England, yesterday called for mega-banks to be split up.

In a highly critical speech yesterday he said:

Why were banks willing to take risks that proved so damaging both to themselves and the rest of the economy? One of the key reasons – mentioned by market participants in conversations before the crisis hit – is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as “too important to fail”.

Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them. And they were right.

The sheer scale of support to the banking sector is breathtaking. In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.

His speech was also covered in the news.

Writing in support in the Financial Times today, Martin Wolf also calls for something to be done, nothing that many banks have already started recovering from the crisis without learning from it.

Finally, as Mr King stresses, banks that are too big or important to fail cannot be expected to manage risk wisely. As he notes: “It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble.” In a market economy, the taking of risk is disciplined by bankruptcy, not underpinned by taxpayers.

Imposing either a “windfall tax” or special curbs on bonuses is an understandable political response to what is happening. But since the aim of current policy has been to transfer money to banks, what is the point of taking it back again? Again, while undercapitalised institutions should not pay dividends or discretionary bonuses, until they have reached their targets, do we wish to see permanent controls on levels of pay? The issue is whether incentives encourage excessive risk taking. That is where regulation should focus.

1. Liberal Conspiracy
   

   Watch: Bank of England's King says banks should be split up http://bit.ly/2dxoZZ

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