Mervyn King: Bankers exploit gullible borrowers to pay for their bonuses By Andrew Clark 5 Mar

 Bankers hit back at Bank of England governor after he warns that drive for profit could spark another credit crunch.

Mervyn King, the governor of the Bank of England, has hit out at banks that exploit 'gullible or unsuspecting customers' for short-term profits. Photograph: Kathy Willens/AP

 A fragile peace pact between the government and Britain's top banks has fractured as the Bank of England's governor, Mervyn King, delivered a scathing rebuke to top financiers for taking big bonuses while exploiting "gullible or unsuspecting" customers. 

 In an attack that drew an angry reaction from the Square Mile, King suggested that "imbalances" in the banking system are beginning to grow again, posing a risk of another credit crunch.

 The governor, who will get broad powers to regulate the banking industry when the Financial Services Authority is abolished next year, accused high-street lenders of taking a short-term view to "simply maximise profits next week". And he asked: "Why do banks in general want to pay bonuses? It's because they live in a 'too big to fail' world in which the state will bail them out on the downside."

 King's remarks, to the Daily Telegraph, are his sharpest swipe yet at banks, which had hoped that last month's Project Merlin agreement to increase small business lending would draw a line under criticism of their behaviour. The governor's comments were widely interpreted as a warning to the chancellor, George Osborne, to heed any recommendation of a break-up of big banks by an independent commission.

 The deputy prime minister, Nick Clegg, echoed King's comments in his speech to the Scottish Liberal Democrat spring conference in Perth.

 "I understand why people are angry when they hear about the super-sized salaries and bumper bonuses awarded to top bankers," Clegg said.

 "I am too. I agree with Mervyn King today that the job of making our banks safe and responsible is not yet complete."

 The British Bankers' Association rejected King's comments as superficial and outdated. The lobbying group's chief executive, Angela Knight, said: "There have been massive changes within the industry which I don't think have been recognised in his comments. Nobody can build a business unless they're close to customers and providing people with products and services that they want."

 Knight said that, far from being too big to fail, banks were facing new legislation allowing them to be wound down in an orderly manner if they get into trouble. She defended bonuses: "You either pay the going rate in an industry or your workforce walks off down the road."

 No stranger to political heat, King has been the Bank's governor since 2003 and came under pressure last year when WikiLeaks cables revealed he had made disparaging comments to the US ambassador about David Cameron and George Osborne. Last week, he told MPs on the Treasury select committee he was surprised public anger towards banks had not been even greater.

 This weekend, he accused banks of routinely ripping off clients: "If it's possible to make money out of gullible or unsuspecting customers, particularly institutional customers, [they think] that is perfectly acceptable."

 Asked whether there could be a repeat of the financial crisis, King said: "Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again."

 Shadow Treasury minister Christopher Leslie said King's comments highlight the government's failure to extract lasting commitments to reform from the City: "Project Merlin was supposed to draw a line under these issues but it failed to convince the public, or even the governor of the Bank of England, that the balance of risk and reward was correctly established."

 Many financial experts believe that Sir John Vickers's five-strong independent commission on banking, which reports later this year, will call for a clear separation between high-street and investment banking operations to prevent the public from footing the bill for catastrophes on City trading floors. But the chancellor, who is keen to offload the Treasury's shareholdings in bailed-out banks such as Lloyds and RBS, is believed to be cautious about major structural changes.

 The economic secretary to the treasury, Justine Greening, told BBC News that King's criticisms of banking were likely to strike a chord with the public: "People will recognise a lot of his comments about regulating the banking industry and in terms of how [the banks] deal with consumers."

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