Radical reform is needed to make the banking system safer, Britain's top central banker said on Tuesday, adding U.S. President Barack Obama's plan to curb some activities would not fully solve the too big to fail problem.
Bank of England Governor Mervyn King said there was no silver bullet to solve the banking sector's problems and tinkering with regulation alone, such as bumping up capital and liquidity requirements, would not be enough when stuff happens.
Radical reforms were also needed to change the liability structure of the banking system, so creditors can't simply walk away unscathed when a bank fails, King said.
It's a belt and braces approach that is needed with many belts and many braces, King said.
It won't be easy to bring about and we shouldn't plan to do it overnight and indeed one of the bigger reasons for not rushing into this is the need to ensure that the banking system ... will still lend, King told parliament's Treasury Select Committee.
Regulators are looking for ways to stop banks -- and those who invest in them -- from assuming they will be rescued by public funds because their failure would destabilize the broader financial system.
British banks had to be bailed out in hugely costly programs last year, with lenders such as Royal Bank of Scotland and Lloyds now largely state-owned, making the country one of the hardest-hit by the crisis in Europe.
Pretending a risky financial system can provide safe returns was simply alchemy, King said, but he expected progress in forging a broad brush approach on what each country does when a cross-border banks goes bust.
Obama stunned the world's financial markets last week by unveiling plans to limit deposit-taking banks from owning hedge funds, private equity groups or trading on their own account, known as proprietary trading.
Britain, France and Germany welcomed the initiative but stopped short of pledging to copy it.
King said Obama's plan signaled radical reform was now on the agenda but there were alternative solutions.
He outlined a three-legged stool approach to reform: raising capital and liquidity levels; introducing resolution mechanisms such as living wills; and having a debate about how the structure of banks can be changed over time.
These are very difficult questions ... there are no simple answers. If there were I rather think that previous generations would have found them so we should recognize they are complex, King said.
Britain's opposition Conservative party has pledged to hand back bank supervisory powers to the Bank of England if it wins the next election by June, as polls forecast.
The International Monetary Fund is due to come forward with proposals on how to make banks, rather than taxpayers, pay for failures in future and is studying a possible Tobin-style tax on transactions and a levy on balance sheets.
In all the components of radical reform that I've discussed ... I think a Tobin Tax is probably bottom of the list, King said. I think the levy is a much more serious proposal because it does go to the heart of the too-big-to-fail issue.
Policymakers are also wrestling with how and when to remove implicit and explicit taxpayer backing for banks and King said this was best coordinated internationally.
He also downplayed earlier speeches in which he appeared to back breaking up big banks, saying it should still be an option.
It's not up to us to judge whether it should be bigger or smaller. We do need a safer and more robust system that may or may not turn out to be smaller, King said.
King wanted to see a more diverse banking sector as the current domination by a handful of superbanks was unhealthy and also predicted other changes to banking business models.
I think that we are likely to see over the next few years a movement in the direction of subsidiaries rather than branches because that makes it a whole lot easier for the national regulators to do their job, King said.
(Additional reporting by Paul Hoskins and Myles Neligan; Writing by Douwe Miedema and Huw Jones; Editing by David Holmes)