Member News
Governor of the Bank of England Mervyn King has told the chancellor to draw up exit strategies from the bank bail outs.
In his Mansion House speech to the City, King also said that government borrowing would need to be reduced over the medium term.
"Five years from now, national debt, as a proportion of national income, is expected to be more than double its level before the crisis, so it is necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament," he said.
The Treasury has previously said it is in no rush to sell back Bradford & Bingley, Northern Rock, and stakes in Lloyds Banking Group and the Royal Bank of Scotland, but is looking to return some money to the taxpayer before the general election to restore voter confidence.
King also indicated that a major shake-up of the regulatory framework is needed.
"Whatever the ultimate shape of the structure and regulation of the banking system, and as many of you have said we need to think carefully to get this right, change will be necessary," he said.
"The costs of this crisis are not to be measured simply in terms of its impact on public finances, the destruction of wealth and the number of jobs lost.
"They are also to be seen in the lost trust in the financial sector among other parts of our economy."
He added: "We have a real opportunity now to put that right and regain the trust that's been lost."
And the Bank governor also indicated that the Treasury was not giving it enough power to implement its new statutory responsibility for systemic financial stability.
Vincent Cable, Liberal Democrat Treasury spokesman, told the BBC that King had been right to question how the Bank will be able to discharge its new statutory responsibility.
"On balance, I support the Bank of England. I think the governor is making a perfectly logical point," he stated.
But Cable warned that there was a danger of becoming too absorbed in "process arguments", where people talk about "the harness rather than the horse".
"I think that the most damaging criticisms that the governor made yesterday of the government was its failure to act on the conduct of the banking system," he explained. "It has been too weak, too indulgent."
The Lib Dem spokesman stated that the government will have to take action to either break up big global banks "which are the source of this financial crisis", or "severely restrict" the protection that banks enjoy.
"There will have to be some degree of shrinkage in the City," he stated.
And John McFall, chairman of the Treasury select committee, argued that the governor's speech was also sending a message to banks that they cannot act in a "business as usual" fashion.
He told the BBC that the relationship between the Treasury, Bank of England and Financial Services Authority was shown to be lacking in "clarity".
"What I think the governor was wanting to do last night, as well as wanting to bring more clarity to this, was sending a message to the banks and the financial institutions that it is not business as usual," he said.
Dods Parliamentary Communications Ltd