The former governor of the Bank of England, Lord Mervyn King, has increased his criticism of global banking regulation, saying not enough was done after the 2008 global financial crisis (GFC) to ensure banks would not collapse should the economy or markets go pear-shaped.
- Lord King says there's "plenty of scope to rethink" banking regulation
- He thinks more should be done to prevent another banking crisis
- High debt levels, mispricing of geopolitical risk causes for concern
"I don't think we have a banking system that is safe," he told the ABC's The Business program.
Runs on banks are still possible, he explained.
"That was the thing, which in October 2008 caused a critical failure of the banking system and financial system in New York, so there is plenty of scope to rethink what we have been doing," he said.
Since the GFC, global regulators, led by the Basel Committee, have set new minimums on the amount of cash that banks must hold as a buffer against any shock, and lending standards have been scrutinised and improved.
But it is not enough, according to Lord King, who was the governor of the Bank of England from 2003 to 2013.
"The idea that we have removed all risk from the system is mistaken," he said.
"We've increased the amount of capital which banks have issued so they can absorb losses — we roughly doubled that and that's a good thing.
"But if you double a relatively small number you end up with something that is still a relatively small number.
"It is much better than it was but I think the idea that we are immune from another banking crisis is a sensible response."
Low market volatility is 'very worrying', Lord King says
Lord King said he does not believe there is any imminent threat of an event that would spark a run on banks, or that the immediate threat to the world or financial system will emanate from banks — but that does not excuse the lack of preparedness.
What will bring down the world will be either the extraordinary levels of private and government debt and/or markets' serious mispricing of geopolitical risk, according to Lord King.
"The amount of debt in the world today is higher than it was before the financial crisis, so we haven't resolved that problem," he said.
"Volatility in markets seems to be at an all-time low. That, I think, is very worrying.
"It is reminiscent of occasions in the past where financial markets ignored major developments in politics and then were suddenly taken by surprise when a big shock occurred."
If the sheer scale of debt does become a significant problem or should there be a repricing of risk, central banks are not going to be in a position to take swift and meaningful action easily by dropping rates — given that they are all close to zero already.
Central banks will be able to splash out on purchasing more government bonds or other assets in order to boost liquidity.
Lord King's concerns over debt were echoed by Australia's banking regulator Wayne Byres — who hinted at a further crackdown on lending.
"Household indebtedness is high. Perhaps more importantly, the trajectory is clearly for it to rise further," Mr Byres told a business conference in Sydney yesterday
"Lenders need to be vigilant to ensure their policies and practices are both prudent and responsible.
"In short, heightened risk requires heightened prudence by APRA but also — and preferably — by lenders and borrowers themselves."
Mr Byers hinted that a crackdown on high loan-to-income mortgages may be on the cards if Australia's debt binge continues.