Ex-BOE’s Tucker Says Bank Regulation Susceptible to Arbitrage

Regulations that rely too heavily on rigid rules are doomed to fail as institutions will find ways to circumvent oversight, said Paul Tucker, former deputy governor of the Bank of England.

“A static rules-based system will not work because a fact of life is that regulatory arbitrage is endemic and finance is a shape shifter,” said Tucker, who was responsible for financial stability at the BOE until October 2013. “There is no static set of rules that will not be undermined in due course by the forces of markets.”

Tucker spoke during a conference in Bretton Woods, New Hampshire, at the hotel where officials from around the world met in 1944 to remodel the global financial system.

Tucker singled out regulatory arbitrage -- and the ability of watchdogs to respond -- as a long-term risk for markets. International supervisors are still moving to strengthen checks and balances on the financial system, seven years after loans made to U.S. homeowners soured, triggering a credit squeeze that contributed to the collapse of Lehman Brothers Holdings Inc. and damaged economies around the world.

European rule changes as a result of the global financial crisis are better than those in the U.S. as policy makers took more time to consider them, Tucker said.

“I am pessimistic about the capability of the U.S. regulatory architecture to be sufficiently nimble,” he said.

Regulatory Update

U.S. lawmakers approved the Dodd-Frank Act in 2010 to facilitate the winding up of large lenders and increased supervision of complex products. In Europe, the Basel Committee on Banking Supervision has revised capital adequacy ratios, leverage limits and liquidity buffers. Basel III is being phased in through 2019.

Inadequate common equity prior to the crisis meant banks weren’t able to withstand any downturn, Tucker said.

“This was an edifice built on something softer than sand; it was absolutely doomed to crumble in a vicious way when everyone woke up to the fact that the banking system had become the ultimate Ponzi scheme,” he said.

Tucker, the favorite to become governor of the U.K. central bank last year, left the BOE in October after missing out on the top job to Mark Carney, ending more than three decades as a policy maker.

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