By Huw Jones
LONDON Dec 11 Banking scandals such as the
rigging of Libor interest rates showed banks were too unwieldy
and should be given incentives to downsize, a Bank of England
(BoE) policymaker said on Tuesday.
Michael Cohrs, a member of the BoE's Financial Policy
Committee (FPC) which sets direction for regulation in Britain,
saw no compelling reason why banks should be so big and global.
Reams of new regulation had not solved the problem of "too
big to fail" banks, which effectively enjoy a funding subsidy
because supervisors cannot let them collapse because of their
sheer scale, the former Deutsche Bank and Goldman
Sachs banker said.
"We have had clear evidence that even the best-run banks
have had embarrassing incidents in the last six months which
show they are too big to be managed," Cohrs told a parliamentary
commission looking into banking standards.
The Serious Fraud Office arrested three people in the first
arrests stemming from a global probe into the manipulation of
the London interbank offered rate or Libor.
Barclays was fined 290 million pounds ($467
million) in June for rigging Libor and other banks are set to
face similar penalties.
The Bank of England becomes Britain's main banking regulator
from next April.
Britain's retail banking sector is dominated by four big
names, HSBC, Barclays, RBS and Lloyds,
and policymakers are keen to see new entrants.
Cohrs urged an end to "London-centric" banks, adding "you
have almost got to legislate for competition".
He had discussed with Treasury officials the possibility of
market share caps to spur more competition and make banks focus
on customers, rather than return on equity, the market's main
indicator of a bank's financial health.
"Maybe we should think about a tax on size, give banks an
economic incentive not to be so big. I believe banks have to be
more regional," Cohrs said.
A "concentration" rule, based on the size of deposits, could
be useful, but he acknowledged no-one on the FPC agreed with him
The planned ring-fencing of retail arms of banks, designed
to shelter customer deposits from risky investment banking
activities, was a step in the right direction, though a total
separation was very hard to do, Cohrs said.
He doubted the recent spate of regulations will change
culture at banks but supervisors could create mandatory
"We need bankers who understand right from wrong and who are
not fixated on what this year's bonus pot will be," Cohrs said.
Changes have been made to how bonuses are paid, such as
deferring them over several years and part-paying in shares
rather than making them all in cash.
The FPC would like to go further and see bankers paid in
their employer's bonds, with deferral over seven to 10 years, he
He dismissed as "rubbish" threats by banks they will move to
another country to avoid heavier UK rules, saying London still
benefited from its time zone and language.