UK must erase taxpayer subsidy for banks – minister

March 8, 2010

By Matt Falloon

LONDON, March 8 (Reuters) – Britain wants to remove the implicit taxpayer subsidy to banks but must not be left alone in clamping down on the financial sector, financial services minister Paul Myners said on Monday.

In a speech to bankers in London, Myners said there was a risk that high-flying financiers had not learned their lesson from the financial crisis and stringent reforms were needed to change behaviour.

Policymakers are increasingly mindful that improving economic conditions across the world may diminish the appetite to overhaul the financial system following the credit crisis.

“We are serious about removing the safety net that has allowed those with blind faith in market efficiency to ignore the consequences of their lack of discipline,” Myners said, according to a text of his speech.

“There is no reason why the public, taxpayers, should continue to provide a free at the source of delivery subsidy to the cost of capital of the banking system. We need to do everything we can to shrink the subsidy to zero.”

Myners also said shareholders in bidding companies should be given more information on target firms to make buyouts safer.

The British government does not favour splitting banks into separate retail and investment entities but wants to see an insurance levy introduced along with “living wills” which spell out how financial firms can be wound down safely.

Britain’s economic prosperity has suffered heavily from the financial crisis with several large banks forced into state protection. The economy crawled out of an 18-month recession at the end of last year and is dogged by a dearth of credit.

Myners said regulatory change could only do so much to improve the system.

“The market did not fail. People failed. Like an over-confident swimmer caught in a riptide, they disrespected the power of the market and were pulled out to sea,” he said.

“The risk is now that their confidence has not been sufficiently dented; that they have not truly learned their lesson. And the danger with this moral hazard is that they could put us all at risk again,” Myners said. Reform needed to be universally adopted to avoid pockets of risk forming again, he said.

“The UK cannot unilaterally adopt standards which are significantly more demanding than in competitor countries without consequent disadvantage to the UK economy in terms of the availability or cost of credit,” he said.

(Editing by Ron Askew and Padraic Cassidy)

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