Reform of the structure and regulation of banking in the UK: Mervyn King speech
Mervyn King, Governor of the Bank of England (BoE), gave a speech to Scottish business organisations in Edinburgh on 20 October. In his speech Mr King mentioned, amongst other things, that the “too important to fail” problem is too important to ignore and went on to comment on the following:

Separation of banking activities. Mr King noted that this approach rejects the idea that some institutions should be allowed to become “too important to fail”. It draws a distinction between the different activities that banks undertake which are (i) the utility aspects of banking; and (ii) some of the riskier financial activities, such as proprietary trading. He mentioned that in other industries there is a separation of those functions that are utility in nature (and are regulated) from those that can safely be left to the discipline of the market. Mr King noted that some claim that such proposals are impractical. However, in his view, the current arrangements are impractical – the belief that appropriate regulation can ensure that speculative activities do not result in failures is, in his opinion, a delusion. He emphasised that the case for a serious review of how the banking industry is structured and regulated is strong – he commented that without the separation of the utility from other components of banking it will be necessary to develop detailed resolution procedures for a wide class of financial institutions. He believes that the options may turn out to be (i) separation of activities, or (ii) ever increasingly detailed regulatory oversight, with the costs that this entails for innovation in, and the efficiency of, the financial system.
Requirement for contingent capital. Mr King also referred to a requirement for contingent capital i.e. capital in a form that automatically converts to common equity upon the trigger of a threshold that kicks in before a bank becomes insolvent. However, he pointed out a number of drawbacks to this approach including the difficulty in calculating how much contingent capital would be appropriate.
In his speech Mr King noted that the crisis suggests that there is a need for additional policy tools that can (i) moderate the growth of the financial sector; and (ii) lean against macroeconomic effects of the credit cycle. He mentioned that the BoE is working with others to explore such macro-prudential instruments, and will be setting out its thinking in a discussion paper and a speech by Paul Tucker later this week.