HSBC Holdings Chairman Stephen Green gestures during the annual shareholders meeting at the Barbican, in London May 22, 2009

HSBC Holdings Plc Chairman Stephen Green said that the world financial and economic crisis is “far from over” two years after it began.

Britain’s economy shrank by 2.4 percent in the first quarter of this year, more than previously estimated, in the biggest contraction since 1958, the Office for National Statistics said Tuesday. While business surveys have indicated the economic slump is easing, unemployment may continue to increase. Net mortgage lending has slowed to the weakest pace since records began in 1993, the Bank of England reported Tuesday.

Green also described as “fantasy” the idea that smaller “narrow” banks provided the best way to return to financial stability.

“Customers, both businesses and individuals, need a wide range of services,” he said. “To force them to go to different types of institution for different services, according to some resurrected Glass-Steagall model, would be totally unrealistic.”

The British government is considering regulatory change to protect depositors after lenders including Royal Bank of Scotland Group Plc came close to collapse last year, people with knowledge of the situation said last week. HSBC and Barclays Plc may be asked to ring-fence their securities units so they could potentially be wound down without systemic risk, under plans being considered by the UK.

Breaking-up the UK’s big global banks would reduce national competitiveness and force customers to use overseas lenders, Angela Knight, chief executive officer of the British Bankers’ Association, told the same London conference.

It was clear that banks needed a “significant increase” in capital “in certain circumstances, proportionate to risk,” Green added.

More equity needed

The largest UK banks need to prepare for the possibility that they will be forced to hold more shareholder equity against the risk of failure, Financial Services Authority Chairman Adair Turner said at the conference.

Mirroring calls by US Treasury Secretary Timothy Geithner for a so-called “tax on size,” Turner said higher bank capital requirements was the best answer to the question of whether deposit-taking and investment banks should be split, and whether there were banks that were too big or too complex to fail.

“Higher equity capital is the answer to the moral hazard problem,” Turner said. Moral hazard describes incentivizing banks to take risks because they know the government will bail them out if they fail. There may be “significantly higher capital ratios than implied in the past for trading books,” he said.

Turner, 53, who published his proposals to “revolutionize” regulation in March, has already called for banks to hold more capital of a higher quality and for a committee to monitor risks to the entire financial system. The question of who would undertake so-called macro-prudential oversight has dominated debate on overhauling regulation.

Source: Bloomberg