May 23, 2012 / 11:01 PM / 5 years ago

BoE's Bailey says free banking may have to end

3 Min Read

* Bailey: myth of free banking must end

* Signals low interest rates for "foreseeable future"

* Banks' contingency plans for euro exit well under way

* Pressure on banks to build up capital, liquidity may ease

By Huw Jones

LONDON, May 24 (Reuters) - Public intervention could increase competition in UK banking and end the "dangerous myth" of free accounts, which may be fuelling product mis-selling, a top Bank of England official said on Thursday.

BoE Executive Director Andrew Bailey also hinted that Britain's interest rates would remain at their record low of 0.5 percent for the foreseeable future, and that domestic banks were ready if Greece ditched the euro.

Bailey said the free banking enjoyed by customers in Britain when not overdrawn makes it hard to link costs to products and services received.

"And I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble," Bailey said in a speech made available to the media.

Barclays, Lloyds, Royal Bank of Scotland , HSBC will pay the bulk of about 9 billion pounds in compensation for mis-selling loan insurance.

"In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying," Bailey said.

There are 120 million current and savings accounts at Britain's high street banks and so far no bank has broken ranks to start charging.

It was also hard for industry as a whole to introduce fees as this could be seen as collusion, Bailey said.

"So, it may require intervention in the public interest, not least because it is a way to encourage greater competition," he said.

His words carry clout as he has been designated as second in command of the new Prudential Regulation Authority at the Bank from next year to supervise lenders and insurers.

Foreseeable Future

Turning to the broader sector, Bailey said pressure on interest margins and income at banks will remain. He also expects risk managers at banks "to take a cautious view and assume continuing low interest rates for the foreseeable future."

Last year Bailey called on UK banks to prepare contingency plans in case countries left the euro area.

Markets are betting that Greece may exit the euro but Bailey signalled that UK banks would be ready but not without a cost.

"Whatever happens in the euro area, there is a cost of adjustment, and that too will act as a drag on the returns earned by banks, and in the worst scenario presents a clear threat to financial stability," Bailey said.

He reiterated the Bank's view that the euro zone crisis remains the biggest risk to UK financial stability.

Bailey also hinted that pressure on banks in Britain to build up their capital and liquidity buffers could be eased to avoid adverse effects on the economy and uncertainty for lenders.

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