Paul Tucker, former deputy-governor of the Bank of England, recently spoke exclusively to Practice Insight on the range of post-crisis tools and how effective they may be if and when the time comes to truly put them to the test.
“Even if you say there’s a 99% chance that everything we put in place works brilliantly well, there’s still a one percent chance that it won’t work,” he said. “The consequences of that one percent crystallising are now worse because big banks are even bigger. I don’t know whether that’s a one percent, 0.5% or even 10% risk. But it is clear that the number one question is whether the biggest banks and clearing houses could be resolved without a taxpayer bailout.”
If resolution schemes don’t work for US G-Sibs, the cost will be catastrophic.
Tucker was disappointed that fairly small Italian banks needed to be bailed out in 2017 along with an injection of €17 billion: a sign that the new resolution schemes are not as robust as previously imagined.
“As policymakers, one thing my generation didn’t crack is the question of incentives,” Tucker added. “I think bankers should be paid in bonds that write down to zero if ever their institution enters bankruptcy or resolution. Those bonds should be locked in for a very long time so that their wealth, not just their income, is dependent on the institution surviving, because otherwise, if the system fails, the public and businesses suffer but the bankers themselves remain fantastically rich. Currently, the incentives aren’t tilted in the right direction.”
Read the full report here:
- Part one: Transparency makes markets safer but more complex
- Part two: Banking culture improves; challenges remain
- Part three: More fragmentation in the short term
- Part four: How regulation has changed the competitive landscape
- Part five: How effective are the new universal safeguards?
- Part six: Potential sources of future crises