LONDON, Nov 24 (Reuters) - Investor appetite for British government debt could be damaged if its bank regulation is not reformed to remove an implicit state guarantee to large banks which undertake risky activities, Bank of England Governor Mervyn King said on Tuesday.
King stepped up his calls for a clear separation between banks which provide essential everyday financial services and those engaged in riskier activities when he testified to the economics committee of Britain's upper house of parliament.
While international agreement on bank reform was desirable, other governments might not move with the urgency Britain needed because the bank liabilities they effectively insured were much smaller than Britain's as a share of economic output, he said.
"It would be a serious mistake for us to rely on the rest of the world solving this problem because, in the end, if we don't ... people who buy government bonds around the world will say the UK is a bit of a risk," King said.
"The Americans have a big advantage here. It's a simple comparative advantage -- they can afford to let too-important-to-fail go on because their banking sector is less than one times GDP," said King, adding that Britain's banking liabilities amounted to five times GDP.
Britain's government borrowing has rocketed during its sharpest recession in decades, in part because of the cost of bailing out Royal Bank of Scotland and Lloyds Banking Group last year.
King said in earlier testimony on Tuesday that a failure to develop a clear plan for significantly reducing borrowing over the next five-year parliament could also damage appetite for British government debt, which to date has held up well -- partly due to the BoE's 200 billion pound quantitative easing programme. (Reporting by David Milliken) ((Reuters Messaging: david.milliken.reuters.com@reuters.net; david.milliken@reuters.com; +44 20 7542 5109))