King: UK 'risks fresh financial crisis'

Britain risks suffering another financial crisis unless fundamental reforms of the banking sector are pushed through, the Governor of the Bank of England warned tonight.

Mervyn King said problems still remained and “imbalances” in the system were “beginning to grow again”.

He also urged high-street banks to take a longer-term approach to their business and not simply try to “maximise profits next week”.

The intervention, in an interview with the Daily Telegraph, comes as a British Government commission is considering whether financial institutions should be forced to separate retail and investment banking arms.

“We allowed a (banking) system to build up which contained the seeds of its own destruction,” Mr King said.

“We’ve not yet solved the ’too big to fail’ or, as I prefer to call it, the ’too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.”

Asked if there could be a repeat of the financial crisis, Mr King said: “Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again.”

Mr King suggested that the culture of short-term profits and bonuses could be to blame for the issues. Traditional manufacturing industries had a more “moral” way of operating.

“They care deeply about their workforce, about their customers and, above all, are proud of their products,” he said.

“(With the banks) there isn’t that sense of longer-term relationships. There’s a different attitude towards customers. Small and medium firms really notice this: they miss the people they know.

“If it’s possible (for financial services firms) to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable.”

However, good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”, according to the governor.

He stood by previous comments that appeared to endorse the coalition’s strategy for reducing the deficit. Shadow chancellor Ed Balls has warned the governor against becoming too political.

But Mr King said: “It is inconceivable that the governor has no view on the size of the deficit and the need to reduce it.

“It would be a dereliction of duty for me not to warn. You need a credible plan to reduce it, over the lifetime of a Parliament. But it is for ministers, not for me, to say how this should be done.”

Pressed on the chances of an imminent interest rate rise – potentially as early as next week – Mr King said there was a “perfectly reasonable case for doing it now”.

But he added that increasing rates too soon would be a “futile gesture”.