David Murray's Plan To Fence Off Activities In The Big Banks Just Got A Huge Boost

David Murray / IMF

David Murray’s idea to follow US and UK regulators by formally splitting the commercial banking arms of Australian Banks from the more speculative trading arms has found support in the past 24 hours from former Bank of England Governor Mervyn King.

King told the AFR, “I think some ring-fencing is inevitable, as you go ahead, in order to avoid the terrible moral hazard from taxpayers having to bail out highly risky investments made through the medium of a bank”.

Moral hazard and too-big-too-fail (TBTF) appear to be of particular interest to the Murray Inquiry based on the interim report released last month while US legislators also have TBTF in their sights.

Interestingly, in what is a great example of how capitalism and investments are supposed to function, King said hedge funds were a good example of “success” during the financial crisis.

“One of the great success stories of the crisis were hedge funds, because no one believed they were going to be bailed out so the people who leant [them] money were pretty cautious about how much they leant. Many hedge funds made money, many lost money, thousands went bust. That’s a good thing, that’s what a ­market economy is,” King said.

The major banks too-big-too-fail status seems to be on borrowed time.

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