Global Financial Strategy - Tucker: Resolution regime 'top priority'

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Tucker: Resolution regime ‘top priority’

Tuesday 31 January 2012 – by Karina Whalley

The UK’s central bank deputy governor says a credible resolution regime for failed banks is the highest priority in regulation and has called for a simplification of too-big-to-fail entities.

Paul Tucker, also a board member of the Financial Services Authority said any resolution regime, not only bail-ins, will leave unsecured and uninsured creditors vulnerable to losses.

“The highest priority is to put in place a credible regime for managing the orderly failure of banks and other financial institutions, however large, complex or international,” Tucker said in a paper released on Tuesday.

“It would be enormously aided by clearing up the organisational and financial structures of individual Sifiss – scaling back the number of legal entities and simplifying intra-group exposures and guarantees,” he urged.

Simplifying the network of exposures among different firms, banks, dealers and funds in capital markets, would also help achieve controlled wind-downs, the Bank of England deputy said.

There is a common misconception by industry members that bank bail-ins are the only mechanism through which unsecured, uninsured creditors will be exposed to loss, says Tucker.

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“This, of course, is nonsense,” he said and added that any resolution mechanism has that effect.

“The difference between different resolution tools lies in the process through which creditors discover their losses.”

To simplify capital markets, Tucker backs the Basel Committee of Banking Supervision’s proposal for tighter controls to large exposures among systemically important financial institutions, than to other unsecured interbank exposures.

He also said central banks can and should play a more active role in monitoring robust practices and infrastructure in the short-term financing markets, to help build transparency in both primary and secondary capital markets.

Tucker said macroprudential frameworks are being built under which capital requirements can be adjusted temporarily, or “counter-cyclically”, as and when risks are unusually high and reduce them back to normal levels after stressed periods.

But the UK regulator warned: “It would be foolish to declare that policymakers know enough to get all this exactly right.”

Not enough is known about how incentives of asset managers investing in banks’ equity and bonds affect banks’ behaviour, nor the effect of introducing the existing package of reforms on the business cycle now.

However, Tucker says it is crucial to push on with credible reforms in response to public concern so that confidence in the financial system is restored as soon as possible.

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