–Says Move Brings End Of Too Big To Fail Within Reach
–Says Macroprudential Tools Will Make System More Robust

LONDON (MNI) – The G20 decision to move to a ‘Common Resolution
Regime’ for Large Complex Financial Institutions marks a breakthrough on
the “too-big-to-fail problem”, says Bank of England Deputy Governor Paul
Tucker.

In the chapter of a book to be published today on the work of the
Financial Stability Board of global regulators, Tucker says:

“The G20 countries have now agreed to legislate for a common
resolution regime. This is a breakthrough, and brings the end of too big
to fail within reach. A credible resolution regime will ensure that debt
holders, as well as equity holders, are exposed to loss. Creditors will
have a powerful incentive to monitor the risks banks run, increasing
market discipline”.

Tucker says that installing a macroprudential regime is the second
priority for financial authorities. The use of such policy tools, he
says would ensure that the financial system could absorb the impact of
a bust without undue systemic stress.

“Booms in credit growth and asset prices undermine stability by
stretching financial firms beyond endurance. One important set of
macro-prudential tools involves temporarily varying requirements on
balance-sheet structures or financing terms – such as minimum capital or
minimum margin requirements – to reflect the increase in risks”.

He continues:

“Taking the punchbowl in this way may have the beneficial effect of
dampening the boom but, in any case, the system would be in a better
position to absorb the bust without systemic distress”.

Tucker also called for work on greater transparency to deal with
the opaque and complex networks of financial exposures.

“Steps include moving the main over-the-counter derivatives markets
on to a central infrastructure, and ensuring the structure and rules of
central counterparties are safe. They could also include applying
tighter controls on exposures among the largest, most complex firms”.

Central banks should play a more active role in ‘fostering robust
practices in short-term financing markets’ – i.e. repo, securities
lending and commercial paper, Tucker urged.

“This is all especially important for the UK. London’s capital
markets are so international that threats to stability from any corner
of the globe ricochet through our financial system and through our
economy”.

Tucker rejected the idea that reforms of the financial sector
should wait for the recovery to become more entrenched, saying that such
procrastination would itself undermine confidence and threaten recovery:

“…Delay would sap confidence, a crucial condition for sustained
economic recovery. We need a strong financial system: the end of too big
to fail, with banking resuming its proper place in a market economy”.

–London newsroom 0044 20 7862 7491; email: dthomas@marketnews.com

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