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Goodhart Says Banks May Need to Be Restricted on National Lines

Former Bank of England policy maker Charles Goodhart said banks may need to be restricted along national lines as current regulations and laws for the industry are country-specific.

“In that kind of world there is a great deal to be said for trying to make the structure of banks national rather than international,” Goodhart said at the U.K. Parliament’s Treasury Select Committee today in London. “This will run entirely counter to the desires and interests of many universal banks, who will fight it and who will argue we are destroying the global financial system.”

U.K. lawmakers are reviewing banking regulation to prevent a repeat of the financial crisis that sparked the longest recession on record. Bank of England Governor Mervyn King argues that splitting up big banks may be necessary to shield taxpayers from losses resulting from failed institutions. As well as industry resistance, restricting banks within borders could also face European Union opposition, Goodhart said.

“It runs entirely counter to the desire of the European authorities,” he said. “Going down that road effectively means the end of the single European financial system.”

Goodhart, who works part-time at Morgan Stanley Inc., said the size of a financial institution should also be partly based on the size of the economy in which it is based.

“We were put at some risk by allowing our biggest banks to become so large relative to the size of the U.K. economy,” he said.

Economist John Kay, who also addressed the committee, said banks with international operations should have to maintain assets in their foreign locations to provide security for governments and savers.

“We do want banks from other counties to operate in the U.K., but if they do so as the world is now, they’re going to have to maintain assets in the U.K. which we could seize in the event of a failure,” Kay said. “There is no other mechanism by which we can actually ensure that U.K. depositors get paid if that happens.”

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