LONDON (MNI) – Bank of England Deputy Governor for Financial
Stability Paul Tucker warns of the risks of fragmentation and
protectionism in the financial services sector if public money is used
to bail out banks.

In a speech that provides an update on the Financial Stability
Board’s progress in its work on resolving distressed financial
institutions Tucker drives home the message that the world has to move
beyond a system in which there is implicit taxpayer support for banks,
as he warns this leaves the sector ultimately accountable only to
domestic voters.

“A world in which public money is used to bail out banks or
dealers, is a world in which balkanisation is likely because the
authorities that deploy public money are accountable to domestic tax
payers – people with votes in their jurisdiction – and to nobody else,”
Tucker says.

In his speech to the International Deposit Insurers Annual
Conference here, Tucker underlines the key role played by deposit
insurance in international efforts to build a solid and stable global
financial sector but warned that it is not simply enough to have a
deposit insurance system.

Tucker also said that the ultimate goal of resolution regimes is to
get to a situation whereby any bank can be allowed to fail.

“The objective is, of course, to get to a position where public
money is never used to provide solvency support for a failing bank,
however large or complex,” Tucker said

Tucker said it would be difficult to have pre-planned strategies
for dealing with failing banks, adding that the necessary tactics will
depend on the circumstances any troubled firm finds itself in.

“But although authorities should try to indentify a preferred
strategy and should be as transparent as possible, I should caution that
what turns out to be the best approach in the event of distress will
depend on the circumstances,” Tucker said.

Tucker also said that international authorities are committed to
maintaining global finance and the free flow of capital across borders,
but warned that a continuing with a fragile financial system is also a
threat to globalisation.

“The balkanisation of finance would cut against the extraordinary
historical changes towards a much more globalised real economy,” Tucker
said.

On the various global regulatory initiatives to improve bank
resolution regimes, Tucker says the EU’s recovery and resolution
directive will be “an enormous step forward.”

He also embraced the Vickers proposals in the UK and the EU’s
Liikanen report, which both proposes variants of ring-fencing core
functions within the banking sector.

He said these “work with the grain of the FSB’s (Financial
Stability Board’s) approach to resolution.”

The speech makes no reference to the UK’s domestic economic and
policy conjuncuture.

–London newsroom: 00 44 20 7862 7492; e-mail: wwilkes@marketnews.com
drobinson@marketnews.com

[TOPICS: M$$BE$]