Bank chief backs isolating banks' riskier activities

October 21, 2009 01:12:33 PM

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Britain's central bank chief said Tuesday that banks should separate their day-to-day business from their more speculative and riskier activities, which he said should not benefit from state guarantees.

In a speech to business leaders in Scotland, Bank of England chief Mervyn King said the G20's proposal to raise capital requirements was one way to prevent against future banking collapses, but said it would not be enough.

Instead, he advocated a solution that has gained ground in recent months, to split the economically indispensible functions of banks -- such as lending to businesses and individuals -- with their "riskier financial activities".

This would have the "aim of restricting government guarantees to utility banking", King said.

He rejected the argument that such a separation was "impractical", saying that in other industries, some functions were regulated and others "left to the discipline of the market". This could also be applied to banks, he said.

"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 the first place," King said.

He added: "It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities."