We'll let banks fail, says Mervyn King

Banks will be allowed to fail under new rules for regulating the City, the Bank of England governor said today.

Mervyn King told MPs the focus would switch from propping up ailing institutions to letting them collapse in a way that does not "cause havoc". The approach was characterised as "smooth failure" by deputy governor Paul Tucker, at the Treasury select committee.

The Government has announced plans to overhaul the system of bank supervision, splitting the dual role undertaken by the Financial Services Authority.

Mr King said this would result in focusing on big risks rather than detail. He added: "The objective of supervision is to recognise that banks will fail."

Under the plans, the Bank will be responsible for "big picture" regulation by overseeing the Prudential Regulation Authority. The Financial Conduct Authority will deal with consumer protection and markets.