King is speaking to Osborne as well as Darling
Post-meltdown Mansion House was always going to be a little different from the traditional orgy of self-congratulation, backslapping, and an ever lighter regulatory touch.
But in the end the bruising speech came from the governor of the Bank of England rather than the chancellor of the exchequer.
Last night Mervyn King was looking beyond the man sat just to his right, the chancellor, and a little further towards the man who seems likely to succeed him. Indeed, in current circumstances, both the bankers expecting a tougher regulatory hand, and the international bond traders who will determine how much the UK can borrow, should have one of their ears directed towards George Osborne.
The Conservatives are coming up with a coherent critique of the excesses of the credit boom. They are yet to apply much policy flesh to that. But it may see George Osborne take a tougher line with bankers than the current government.
The shadow chancellor has already spoken of the need for smaller banks. Yet yesterday the actual chancellor told the City that while it “can’t carry on as if nothing has happened,” that “the solution is not as simple, as some have suggested, as restricting the size of banks”.
Mervyn King then got up and announced “if some banks are thought to be too big to fail then they are too big… it is not sensible to allow large banks to combine high street retail banking with risky investment banking and then provide an implicit state guarantee against failure.”.
On the structure of regulation, the chancellor last night repeated a defence of the tripartite system set up by Gordon Brown in 1997, and we’ll see more on this when the chancellor publishes its white paper on banking reform in the coming days.
Mervyn King said rather directly that his institution needed more policing powers rather than the ability to offer sermons. George Osborne last night told me (in an interview we’ll publish later) that he backed giving more powers to the Bank of England, just as President Obama was planning to embolden the US central bank, the Federal Reserve.
And then there is the vexed issue of public spending and fiscal fudgery – today a record for monthly borrowing by a British government of £19.9bn in May alone. More on that later, but in broad terms Mervyn King seemed to be on the same side as George Osborne.
But then again, compared to the prime minister’s proclamations of rising investment spending when the budget shows that it is halving, I would not be surprised if the chancellor was in with the King-Osborne axis on this issue.
There is a link of course between our fiscal woes as a nation, and the financial meltdown. It is the hundreds of billions of pounds supporting the banking system. Mervyn King referred to this as support on an “unimaginable scale”. The chancellor believes it was all necessary and will point to those embryonic green shoots as justification. But I do wonder whether the shadow chancellor could rein some of this in.
What we can say the day after Mervyn’s Mansion House moment, is that the Bank of England stands to get much more of its wish list under the Conservatives than Labour. That won’t be lost on the current inhabitant of Number 10, the man who granted the Bank of England so much power in the first place.