March 5, 2011 / 3:24 PM / 6 years ago

UPDATE 3-UK banks tell BoE's King they have changed

* UK banks hit back after criticism from central banker

* BoE's King sees risk of new banking crisis

* Finance minister says changes should prevent a repeat

(Adds Cable comment)

By Keith Weir and Adrian Croft

CARDIFF, March 5 (Reuters) - Britain's banks said on Saturday they had made their businesses safer, clashing with Bank of England Governor Mervyn King who warned about the risk of a fresh financial crisis in an outspoken interview.

"The banking industry recognises that some of its number got it badly wrong during the crisis. Since then the industry has reformed radically," Angela Knight, chief executive of the British Bankers' Association, said in a statement.

"We entirely agree that no bank should believe it can fall back on the taxpayer," she added.

"The changes from top to bottom within the industry have ensured the risks are well controlled."

In an interview with the Daily Telegraph, King warned imbalances in the banking system were growing again and could lead to a repeat of the 2008 financial crisis. [ID:nLDE72404L]

King added that the knowledge that the state would always underwrite banks led to a culture of excess in risk and bonuses.

"The concept of being too important to fail should have no place in a market economy," he told the Daily Telegraph.

Asked by the paper whether the financial crisis could return, he said: "Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again."

King's comments come at a sensitive time with an independent banking commission, set up to look at splitting up the retail and investment banking arms of the country's top banks, to deliver its final report in September.

Paul Tucker, a Bank of England deputy governor, told a parliamentary committee this week that new regulations could bring a major restructuring of the industry. [ID:nLDE72014R]

CHANGE ON THE WAY

Britain spent tens of billions of pounds bailing out Royal Bank of Scotland and Lloyds Banking Group during the banking crisis and the state has been left with large stakes in each.

Finance minister George Osborne said changes to the regulatory system, which will see the central bank led by King take over control of banking regulation in 2012, should prevent a repeat of the financial meltdown.

"Within five weeks (of taking power last May) we had launched fundamental reforms to Labour's failed system of regulating banks," Osborne said in a speech to a Conservative party meeting in the Welsh capital Cardiff.

"Protecting the taxpayer, putting the Bank of England in charge and making sure that never again is a bank too important to fail," Osborne added.

The Liberal Democrats, the junior coalition partner, said that making the banks secure was a work in progress.

"His (King's) basic point is that the banking system still isn't safe. We need to continue to worry about that problem and that's why the banking commission is so crucially important," Business Secretary Vince Cable, a Lib Dem, told Reuters.

"The Governor has said many times, and I echo entirely what he says, that until we deal with the issue of bank structure the banks will not be safe," he added.

Opposition Labour leader Ed Miliband urged the government to reinstate a tax on bankers' bonuses imposed by Labour last year.

Unions are angry that bankers remain well rewarded when the government is introducing deep spending cuts that will see 330,000 public sector workers lose their jobs.

King criticised a culture of short-term profits and bonuses within banks and was scathing about the way in which they treat their customers. He said traditional manufacturing industries operated in a more "moral" manner than banks.

"If it's possible to make money out of gullible or unsuspecting customers, particularly institutional customers, (they think) that is perfectly acceptable," he added.

Editing by Michael Roddy

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