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Mervyn King at loggerheads with financial community

There is growing resentment in the financial community regarding potential reforms backed by Mervyn King which would see financial sector loans and debt potentially converted into equity in troubled times. These are part of the ongoing discussions regarding the strengthening of balance sheets and the strengthening of the financial sector as a whole. But why are there concerns in the marketplace?

While the idea of increasing the buffer between required financial strength and actual financial strength is a sensible one, the idea that loans and debt could, in troubled times, be converted into equity may well give the wrong signal to investors and to the marketplace as a whole. There are concerns we could move towards a potential Northern Rock situation if investors became aware that any debt or any loans connected to any financial institution had been converted into equity.

The truth is that the financial sector is, at the moment, very much against change even though the tide has turned and inevitably balance sheets will need to be adjusted and there will almost certainly be a larger safety buffer required in the future. It is proving more and more difficult to find a compromise with which all parties are happy and it looks likely that talks and discussions will go on for some time yet.

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