‘Worst may still be to come’

Paul Tucker told an audience of bankers that while the sector has passed “huge risks”, it faces big challenges.

“We are in very difficult circumstances at the moment,” said the central banker. “Huge risks are behind us but there is still the tangible probability – not a high probability – that the worst may still be ahead.”

The banking conference in central London focused on “restoring trust” in a sector dragged down by scandals including loan insurance mis-selling, rogue trading and Barclays’ rigging of the interbank Libor rate.

Rogue bankers who attempt to manipulate inter-bank interest rates will face “the full force of the law”, warned the Government yesterday. Financial Secretary to the Treasury Greg Clark told the conference he was pressing ahead with plans to make it a criminal offence to manipulate rates such as Libor.

Mr Tucker, a favourite to succeed Mervyn King at the helm of the central bank, said senior bankers should be rewarded with subordinated debt in a bank so they have a vested interest in its survival.

“We need a world where the leaders of a bank have a significant financial stake not just in the prosperity of the firm but in the survival of the firm,” he told the conference held by the British Bankers’ Association (BBA) – the body which oversees Libor.

Mr Tucker warned the public will not tolerate having to bail out another bank. The state was left holding four fifths of Royal Bank of Scotland, about 40 per cent of Lloyds Banking Group, and has also carved up Bradford & Bingley and Northern Rock.

Government, regulators and bankers are wrestling with ways of avoiding recourse to the public purse in future.

“Were we again to find ourselves in a position where taxpayer money was used to support the banking sector, I think the backlash would be uncontainable,” said Mr Tucker.

Instead, holders of bank debt such as insurance companies should be forced to bear the brunt when a bank fails, via a system called resolution, he said. “We can and will put losses on to the debt holders and bond holders,” he said. “They were the people that we bailed out – holders of bank bonds and unsecured creditors of banks.”

He added making it easier for banks to wind down will also reduce barriers to entry, thus increasing competition.

RBS chairman Sir Philip Hampton told the conference the bank will complete its restructuring by the end of 2013, paving the way for possible sale of the Government’s 82 per cent stake before the next general election in 2015.

“Obviously, it’s up to the Government to decide when to sell the shares,” he said. “I think it’s a reasonable aspiration, and it’s consistent with what we are trying to do with our restructuring, to start selling the shares before the next election.”

The government is sitting on a £20bn loss on the £45bn of capital it pumped into RBS.

Panelists at the conference all agreed Europe’s debt crisis poses the biggest threat to Britain’s economic fortunes.

Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards said there can be no long-term recovery for Britain’s economy unless its banks recover properly. “The eurozone crisis is the elephant in Britain’s economic room. The scope for a UK recovery will remain precarious until the euro recovery takes root,” he said.

Anthony Browne, new chief executive of the BBA, said while banks were the cause of the crisis, they are also “the way out of it”.

“We need banks. They are the lifeblood of the economy.

“It’s not that we can’t thrive without banks – we can’t live without them.”

However, Mr Browne, who took over from Angela Knight last month at the head of the industry body, said banking has much further to go.

“We need to show our customers and the public that we live on the same planet as them,” he said.

The BBA yesterday announced the appointment of Sir Nigel Wickes as its chairman. The former chair of the Committee on Standards in Public Life is also chairman of Euroclear.

The conference also heard from Mark Morris, finance director of engineer Rolls-Royce, who challenged banks to fix their broken model.

He said when large firms can access funds, “why is it that our suppliers are struggling to invest for the same growth?”

“The system is not working,” he said. “We have a full order book and we are ramping up volumes.

“We find ourselves in the bizarre situation of having to provide supply chain financing to our suppliers because the banks won’t. We’re doing that out of necessity, not through choice.”

The engineering giant, which makes engines for aeroplanes, has around 8,000 suppliers with 6,000 of these based in Europe.

“For every job that Rolls-Royce creates, it creates six to eight in the economy,” he said. “We are part of a food chain.”

Standard Chartered chief economist Gerard Lyons said while the UK is “past the worst”, its recovery will be an “invisible” one. “No one country is de-coupled from any other country in the world,” he said.

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