Financial News

LONDON (ShareCast) - Suggestions from Mervyn King, the Governor of the Bank of England, that big banks should split their businesses into utility and investment arms have been given short shrift by the big guns of the Labour Party, Gordon Brown and Alistair Darling.

Addressing Scottish business leaders in Edinburgh on Tuesday evening, King indicated his preference for a system that separates the "utility" aspects of banking - payment systems and deposit taking - from investment banking and proprietary trading. "There are those who claim that such proposals are impractical. It is hard to see why," he said.

However, Prime Minister Gordon Brown told MPs in the House of Commons on Wednesday that 'the difference between having a retail and investment bank is not the cause of the problem.'

Brown noted that Northern Trust was 'effectively a retail bank' while Lehman Brothers (NYSE: LEH - news) 'was effectively an investment bank' without a retail arm, yet that did not stop either of them failing,

Meanwhile, Chancellor of the Exchequer Alistair Darling, speaking in the financial district of London's East End, suggested that separating investment and consumer banks was not 'right for the 21st century.'

The Treasury and the Financial Services Authority have rejected the idea of splitting up the banks. Instead, they propose the formation of living wills, where they have a plan to wind themselves down if they run into serious trouble in the future.

One area where the Governor and the Chancellor seem to be on the same page is on the need for banks to reform their behaviour.

'It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place,' King said in his speech.

Darling, meanwhile, responded to a statement from Goldman Sachs (NYSE: GS - news) vice-chairman Lord Griffiths of Fforestfach that Britons had to 'learn to accept' the fact that some people would earn millions in bonuses by saying that such a statement 'sends the wrong signals'.

'I've spoken to all our banks and none of them would be standing here today if the taxpayer hadn't put their hand into their pocket,' Darling said, after accusing some banks of 'not getting' the new attitude on huge bonuses.