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Bank of England Executive Director Wants to Stop Free Banking

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The Bank of England's executive director has raised the prospect of official intervention against free banking in an effort to clamp down on mis-selling of financial products.

Andrew Bailey also highlighted the debate about the speed at which banks are being required to hold more capital.

Having urged banks to construct contingency plans for the break-up of the eurozone, the top banking regulator also reiterated that the "biggest risk to stability that we face" came from the euro area.

He said: "Whatever happens in the euro area, there is a cost of adjustment, and that, too, will act as a drag on the returns earned by banks, and in the worst scenario presents a clear threat to financial stability."

Bailey is acting head of the body that is to become the Prudential Regulation Authority, which is to be set up in the Bank of England to oversee the industry after the resignation of Hector Sants.

He has previously caused controversy by suggesting free banking, where current account customers in credit do not a pay a fee, was "a myth" – but goes a step further, raising the need for official intervention.

He said free banking might encourage mis-selling of financial products because of the "unclear picture" of the price of banking, saying reform of the banking industry could not take place until "we have a much better sense of what we are paying for and how we are paying".

He added: "But in truth this is not something that will happen spontaneously. It is hard for a single bank to break out of the existing situation without appearing to raise the price of its service to customers even though it may not actually be raising the price as a whole. And, it is hard for the industry as a whole to break out without appearing to collude.

"So, it may require intervention in the public interest, not least because it is a way to encourage greater competition ... But, even if I am like a dog with a bone on this one, I don't think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking."

Read more at the Guardian...

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