Paul Tucker, the deputy governor of the Bank of England responsible for financial stability, fired a broadside at Mervyn King’s idea of splitting banks on Thursday in a sign of widening divisions at the top of the bank.
Mr Tucker’s intervention comes a day after his boss’s policy recommendations on banks were repudiated by both Prime Minister Gordon Brown and Chancellor Alistair Darling, heightening Mr King’s isolation in Whitehall.
Mr King has called for institutions to be broken up into utility banks and riskier investment banking arms, so they do not become “too important to fail”. Mr Tucker, touted as a future governor, contradicted Mr King with a call for a more flexible approach. “Personally, I do not much like the notion of a list of ‘systemically important firms’ because, as a previous generation of policymakers taught us, what proves to be systemic depends so very heavily on the circumstance.”
Mr Tucker called instead for financial reforms to focus on the handling of banks’ bankruptcy and safeguards for taxpayers to avoid a repeat of the global financial crisis and the ensuing government bail-outs.
In a lecture at Barclays, Mr Tucker indicated he thought the structure of banking was likely to remain broadly unchanged and conceded the Bank was now less certain about its ability to tame credit booms and busts.
In a further departure from the governor’s position, he added that his other comments on regulation would be “based on something like the existing structure of the banking system persisting”.
Mr Tucker’s dissent from the governor in the normally deferential culture of the institution highlights the new-found power of the financial stability wing of the Bank.
Instead of splitting up banks now, Mr Tucker praised the idea of “living wills” to enable failing banks to be split up at death, something Mr King also supported but said would come at the cost of innovation and efficiency in the system.
Mr Tucker was keener on the idea, but added that since all proposals for future regulation “will sometimes prove flawed”, a system of taxpayer support as a last resort should explicitly be provided on the understanding that the banks would pay the exchequer back in future.
Mr Tucker did support the idea of changes to banks’ regulatory capital for different categories of lending and speculation.
On monetary policy, his remarks were balanced. He said that the big question was whether “recovery will be anaemic” and whether “some of that insurance [against a depression] could be withdrawn”.