A deputy's mutiny

Anyone who knows the Bank of England, knows it is a deferential sort of place. Officials parrot back the latest comments from the governor. So Paul Tucker’s broadside against Mervyn King this evening on the quesiton of bank regulation is little short of mutiny.

Damning Mr King with faint praise, the deputy governor for financial stability welcomed the fact Mr King had called for banks to hold more “proper, loss-absorbing capital,” something everyone agrees. He also highlighted that the governor stressed the need for banks to explore whether they could raise contingent capital, which automatically turns into equity when a bank is in trouble, from the private sector.

But on the governor’s call for splitting banks up into utility companies with explicit state guarantees and other more speculative ventures, Mr Tucker could not have been more dismissive of the governor’s arguments.

He starts by suggesting the governor is out on a limb:

“Since the thoughts on macroprudential instruments I shall go on to outline this evening are based on something like the existing structure of the banking system persisting, I shall briefly recap what I have said in a series of speeches earlier this year about the current reform agenda”

When talking about additional capital requirements for systemically important banks, he dismisses the governor’s argument that you can distinguish the subsidised and safe from the speculative and dangerous. This is the same point the Treasury keeps making about how Lehman Brothers and AIG demonstrate that it is impossible to say credibly that you will not save a bank on the brink of failure.

“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 circumstances.”

And unlike the governor, who suggested the creation of living wills for banks was bureaucratic and would stifle efficiency, Mr Tucker thinks these along with taxpayers offering capital as a last resort is the way forward.

“No one should think that this will be easy; or that anyone in the official sector is naïve about that. It will, in fact, be formidably difficult.”

This might explain why Mr Tucker is irritated at Mr King’s focus on the simple-sounding solution of splitting-up banks.

His speech also includes the Bank’s retreat from its insistence on the merits of “macroprudential” tools to damp credit cycles in future. This is impossible, the deputy governor thinks, because one country cannot impose regulations on branches of foreign banks stationed in the country. But he is more hopeful that similar tools might reduce the domestic banking system’s systemic vulnerability even if borrowers can still borrow from other country’s banks in a future boom.

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