BANK of England Governor Mervyn King gave a stark warning last night that Britain's top banks need to prepare a plan for their orderly rundown. And he argued that Britain's central bank would need to do more than preach sermons if future bank crises were to be avoided.
Speaking at the Mansion House dinner, he likened the current position of the Bank to that of a church only authorised to administer weddings and funerals.
He said: "Experience suggests that attempts to encourage a better life through the power of
voice is not enough. Warnings are unlikely to be effective when people are being asked to change behaviour which seems to them highly profitable. So it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials."
Declaring that Britain's financial sector had become too big and too reliant on debt, he said the process of reducing very high leverage "is doing great damage to the rest of the economy. And the required adjustment has a long way to run".
He said the banks' ability to finance a sustained recovery remained impaired by low levels of equity capital.
"One important practical step," he added, "would be to require any regulated bank to produce a plan for an orderly wind-down of its activities. Making a will should be as much a part of good housekeeping for banks as it is for the rest of us."
The Governor said there was "no case for excessively bureaucratic regulation. But change to the structure, regulation and indeed culture of our banking system is necessary."
