Deputy’s call for global framework to shield taxpayers

Bank of England Deputy Governor Paul Tucker said the EU law on bank recovery and resolution would be a milestone towards a global system and help convince markets that governments were no longer willing to rescue “too big to fail” lenders.

Since governments had to shore up banks during the 2007-09 financial crisis, regulators have wanted to stop markets assuming big banks would not be allowed to go out of business.

The European Parliament’s economic affairs committee has joint say with EU states on the law that gives regulators powers to impose losses on creditors, replace management and take other steps when a bank gets into trou- ble.

In a speech in the Netherlands, Mr Tucker said there had been “marked convergence” recently on a global approach to winding down banks which typically have operations in many countries.

But more political impetus was needed as it would still be a “nightmare” to wind down a big bank, he added. The EU law will have powers to force big banks to hold a cushion of bonds that can be converted into equity to shore itself up without taxpayer cash.

Mr Tucker said a discussion on such a cushion at the global level was still needed.

This “loss-absorbing” cushion should be equivalent to the amount of capital a lender holds in its capital buffer with an added margin for safety, he said.

The biggest banks will have to hold a core capital cushion of up to 9.5 per cent by 2019 though many are already at or above this level due to market and supervisory pressures.

Banks should not hold large amounts of bonds of other banks and nor should insurers hold chunks of bank debt, Mr Tucker said.

He backed EU consensus that depositors with up to 100,000 euros ($128,000) in their account should not suffer losses in a bail out.

There was also case for some uninsured depositors, such as small businesses and charities to be shielded also, he added.

EU finance ministers agreed last week that large, uninsured depositors should be subject to losses.