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Investors turning towards risky assets, says Mervyn King

Banks need to set up new capital regulations.

Despite lessons from the earlier financial crisis, investors are looking forward to invest in risky assets in order to improve their returns, according to Sir Mervyn King, governor of the Bank of England (BoE).

King, who made his comments at a hearing focused on the stability of banks in the UK, warned that returns on the US junk bonds declined by 6 per cent. Anticipating that investors are turning toward risky assets, the global stock markets grew, he said. However, the UK and many continental European economies are still facing problems.

“The search for yield appears to be beginning again,” King told MPs on the treasury select committee. “A combination of a weak recovery and at the same time people searching for yield in ways that suggest risk being priced in is a disturbing position.”

Former investment manager Robert Jenkins and Michael Cohrs, a former head of investment banking at Deutsche Bank, told the Financial Policy Committee that banks should be forced to hold top quality capital equal to more than 4 per cent of their total balance sheets.

Meanwhile, Andrew Haldane, executive director of financial stability at BoE, and Thomas Hoenig of the US Federal Deposit Insurance Corporation have suggested for tougher leverage ratios to be implemented by banks.

Mr Haldane told the committee that banks’ risk models lacked “any robustness”. “They’re not a sound basis for the setting of capital regulations. That is increasingly recognised not just by regulators, but by investors in banks,” he said. “The regulatory community made a significant error in the 1990s in the reliance it placed on deeply complex and deeply fragile models. That balance now needs to be redrawn.”

Both Mr Cohrs and Mr Jenkins said they doubted banks would ever be able to price risks to the financial system properly. “They didn’t last time,” Mr Jenkins said. “There are many times in history where they’ve failed. It would be a bad bet to bet that they would.”

Andrew Tyrie, chairman of Financial Policy Committee, said: “Listening to the FPC, I had the impression they think that risk weights aren’t worth the paper they are written on and leverage is too high.”

The regulators also accepted that Royal Bank of Scotland (RBS) and Lloyds Banking Group would need to raise new capital or sell off large parts of their businesses.

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Geoffrey Howe dies, aged 88

Howe was Margaret Thatcher's longest serving Cabinet minister – and the man credited with precipitating her downfall.

The former Conservative chancellor Lord Howe, a key figure in the Thatcher government, has died of a suspected heart attack, his family has said. He was 88.

Geoffrey Howe was the longest-serving member of Margaret Thatcher's Cabinet, playing a key role in both her government and her downfall. Born in Port Talbot in 1926, he began his career as a lawyer, and was first elected to parliament in 1964, but lost his seat just 18 months later.

Returning as MP for Reigate in the Conservative election victory of 1970, he served in the government of Edward Heath, first as Solicitor General for England & Wales, then as a Minister of State for Trade. When Margaret Thatcher became opposition leader in 1975, she named Howe as her shadow chancellor.

He retained this brief when the party returned to government in 1979. In the controversial budget of 1981, he outlined a radical monetarist programme, abandoning then-mainstream economic thinking by attempting to rapidly tackle the deficit at a time of recession and unemployment. Following the 1983 election, he was appointed as foreign secretary, in which post he negotiated the return of Hong Kong to China.

In 1989, Thatcher demoted Howe to the position of leader of the house and deputy prime minister. And on 1 November 1990, following disagreements over Britain's relationship with Europe, he resigned from the Cabinet altogether. 

Twelve days later, in a powerful speech explaining his resignation, he attacked the prime minister's attitude to Brussels, and called on his former colleagues to "consider their own response to the tragic conflict of loyalties with which I have myself wrestled for perhaps too long".

Labour Chancellor Denis Healey once described an attack from Howe as "like being savaged by a dead sheep" - but his resignation speech is widely credited for triggering the process that led to Thatcher's downfall. Nine days later, her premiership was over.

Howe retired from the Commons in 1992, and was made a life peer as Baron Howe of Aberavon. He later said that his resignation speech "was not intended as a challenge, it was intended as a way of summarising the importance of Europe". 

Nonetheless, he added: "I am sure that, without [Thatcher's] resignation, we would not have won the 1992 election... If there had been a Labour government from 1992 onwards, New Labour would never have been born."

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.