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Tucker Says New Bank Rules Must Expose Investors to Losses

Bank of England Deputy Governor Paul Tucker said new regulations for the financial system must include regimes to handle failing banks that expose debt and equity investors to losses.

Officials involved in international efforts to rewrite bank rules “are determined, and are on course, to put a credible resolution regime in place,” Tucker wrote in a chapter of the book “Investing in Change” that the central bank released in London today.

“This will ensure that, as well as equity holders, debt holders are exposed to loss,” he said. “Wholesale creditors will then also have a powerful incentive to monitor the risks banks run, increasing market discipline. This is central to reincorporating banks into a market economy.”

Efforts to strengthen the stability of the financial system must also address the links between companies, and that should include regulation to improve transparency in capital markets. Tucker said he would favor rules that impose “tighter controls to large exposures” at the world’s largest and most systemically important banks.

“On a second front, central banks can, and should, play a more active role in monitoring and fostering robust practices and infrastructure in the short-term financing markets -– repo, securities lending, commercial paper, and so on,” he wrote.

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