Mervyn King, governor of the Bank of England, has shocked the staid world of British banking by raising the possibility of breaking up the UKs big banks. Mr. King is no socialist, but a worried banking regulator. He is worried about “the sheer creative imagination of of the financial sector to think up new ways of taking risk.”
Around the world, regulators and finance ministers are hoping that banks will grow their way out of their current mess. To do so, however, banks will in fact need to seek new ways of taking on risk. It is called going for broke: the upside goes to stockholders and managers, and the downside to taxpayers. Mr. King knows that it is a “delusion” that regulators can control bank risk-taking.
Whether one agrees with his solution, at least he recognizes the problem. Would that were true of Treasury and Fed officials in the United States.