Britain's Chancellor of the Exchequer George Osborne speaks at JP Morgan in Bournemouth, southern England on Monday. Picture: REUTERS
Britain's Chancellor of the Exchequer George Osborne. Picture: REUTERS

TOP UK and US bank regulators and politicians are pushing for action to limit the risk of their governments again financing the rescue of financial institutions.

Strategies under consideration range from legislation that would cap the size of big banks or make them raise more capital. Regulatory actions to discourage mergers or require that financial firms hold specified levels of long-term debt to convert into equity in a failure are also being considered.

Chancellor George Osborne said on Monday that British banks that failed to shield their day-to-day banking from risky investment activities would face being broken up. After the 2008 financial crisis, the British government poured £65bn of taxpayers’ money into rescues of Royal Bank of Scotland and Lloyds.

The sector has also come under fire for rigging the Libor interest rate, mis-selling insurance, breaking money laundering laws and paying bonuses seen as excessive.

Banks were already expected to have to "ring-fence" operations such as standard bank accounts and payments from their riskier investment banking activities.

But Mr Osborne said in a speech that he was prepared to go further. "If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether — full separation, not just a ring-fence.

"In the jargon, we will electrify the ring fence ."

The Bank of England will monitor whether banks ensure that risks taken by their investment banking arms do not endanger their retail divisions. If it finds a breach, the government will make the politically sensitive decision on whether to employ the "nuclear option" of forcing banks to sell one of the two arms.

Mr Osborne said his government could punish directors of failed banks by banning them from the industry.

Officials leading the debate in the US, including Federal Reserve board member Daniel Tarullo, Dallas Fed president Richard Fisher and Senator Sherrod Brown, share the view that the 2010 Dodd-Frank Act failed to curb the growth of large banks after promising in its preamble to "end too big to fail". Three of the four largest US banks — JPMorgan Chase, Bank of America and Wells Fargo -— are bigger today than they were in 2007, heightening the risk of economic damage if one gets into trouble.

JPMorgan’s 2012 trading loss of more than $6.2bn from a bet on credit derivatives raised questions anew whether the largest institutions have grown too complex for oversight.

That loss was among events that "have proven ‘too big to fail’ banks are also too big to manage and too big to regulate", Mr Brown said.

Brown and fellow banking committee member David Vitter are considering legislation that would impose capital levels on the largest banks — higher than those agreed to by the Basel Committee on Banking Supervision and the Financial Stability Board.

Reuters, Bloomberg