Reforms will 'reduce chance of failures'

Stephen Hester said bank capital ratios are now much stronger than they were at the start of the financial crisis. Mr Hester was speaking at a panel session titled The Role of Regulation for Financial Crisis Prevention at the University of Glasgow.

He said: "The extensive reforms to capital, liquidity and risk now under way will significantly reduce the probability of failure, but rightly not remove its possibility.

"The essential complement, then, is to ensure that financial institutions can be safely resolved and if bailed out, it should be by shareholders and creditors, not the state."

The financial crisis in the wake of the bankruptcy of US investment bank Lehman Brothers in September 2008 brought many banks to their knees, forcing collapses and nationalisations.

Casualties include RBS, which is now 83 per cent owned by the taxpayer, and Lloyds, which is 41 per cent owned by the taxpayer after a rescue bail-out two years ago. Mr Hester said the main elements to blame for bank failures in the past three years were inadequate risk controls, shortcomings in management, governance and culture, and too much leverage and dependence on wholesale funding.

He said bank failures will still be possible after banking reforms, and that is necessary.

"It is important to the proper functioning of the market that we do not remove that possibility of failure – that would embed entirely the wrong incentives around risk-taking."