Basel III no anti-crisis silver bullet - Bank's King

LONDON (Reuters) - Stricter capital rules set out under the Basel III framework are not enough on their own to prevent another banking crisis and more action is needed, Bank of England Governor Mervyn King said on Monday.

In a speech to the Buttonwood Gathering in New York -- which makes no reference to monetary policy -- King outlined the challenges of reducing risk in the financial system and discussed a menu of options that might help.

He said the Basel III framework, expected to be endorsed by leaders of the world’s biggest economies in South Korea next month, was a step in the right direction but needed to be complemented by a “basket of different measures” to rein in risk-taking.

“If it is a giant leap for the regulators of the world, it is only a small step for mankind. Basel III on its own will not prevent another crisis,” he said.

In September global banking regulators proposed banks be required to hold top-quality capital worth at least 7 percent of their risk-bearing assets, more than three times current requirements. King said he had wanted an even higher threshold, but had no intention of making UK-based banks comply with harsher restrictions than their peers.

“That logic should apply to any reforms we choose to implement,” he said.

King has long been a proponent of aggressive banking reform and has expressed frustration that the same banks that brought the financial system to its knees have enjoyed hefty rewards thanks to government intervention.

He said banks’ reliance on short-term debt to fund long-term investments made them inherently fragile, and the backstop support of taxpayers provided an added incentive to take on risk.

“There is merit in having a basket of different measures to rein in excessive risk-taking,” he said. “In the area of financial stability, it makes sense to have both belt and braces.”

Additional measures, he said, could include a levy on banks -- such as has been adopted in Britain -- forcing large, cross border institutions to take on an extra layer of equity or loss-absorbing capital.

More radical reforms could include separating deposit-taking from risky lending activity, ensuring large amounts of contingent capital in a bank’s liability structure and moving to capital requirements several orders of magnitude higher.

“Banks should be financed much more heavily by equity rather than short-term debt,” King said. “Risky investments cannot be financed in any other way.”

The coalition government has appointed an Independent Commission on Banking to look at ways to reduce systemic risk in the industry. The Commission is due to report by the end of 2011.

Editing by John Stonestreet