Paul Tucker: Introductory remarks at the book launch for “Investing in change – the reform of Europe’s financial markets” Introductory remarks by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Association of Financial Markets in Europe book launch, London, 1 February 2012. *  *  *  AFME’s book is significant as it has reached beyond its own community – of investment and wholesale bankers. The contributions come from journalism, politics, academia, business, and central banking. Each of our communities carries some of the responsibility for the mess that engulfed the world’s financial system, inflicting hardship on households and businesses around the globe. That must continue to drive us as we work to devise new “rules of the game” for a better financial system. This evening, I want to dwell on just one of the guiding principles of the international reform programme: banks should not depend on a safety net from taxpayers. Of course, retail deposits – up to £ in this country – will continue to be insured. And we probably also need measures – possibly segregated accounts – that can protect the Temporary High Balances that arise when, for example, a person sells a house or receives a legacy. But regular creditors of banks should be at risk. Pretty much everything underway in international finance at present reflects the dynamics set in train by a progressive withdrawal of the safety net. Two points on how that will be delivered.
And three points on what it will mean. On the “how”, the first thing to say is that going forward, banks are being required to carry considerably more capital and liquidity. Second, as is now well known within the industry, the international authorities have agreed a blueprint for resolution regimes to manage the failure of so-called Systemically Important Financial Institutions in an orderly way. G20 Leaders have committed to legislate that regime into their domestic systems where necessary. All resolution regimes have the effect of distributing the losses of distressed financial firms – ie losses already or prospectively exceeding equity – across unsecured, uninsured creditors. That is the only place losses can go if taxpayers are to be spared. “Bailin” has focussed minds on this, but is in fact just one method, albeit a very important one, for ensuring that uninsured creditors take losses. Those “how” points are very familiar. A few comments, therefore, on possible implications – all of which, looking ahead, point towards the crucial importance of our capital markets. First, in a world of less leveraged banks, a business model of Originate and Warehouse – because that is what it became by the middle of the past decade – is unlikely to be viable. Maybe a genuine model of Originate and Distribute will emerge, with something like agencytype market making and trading. Second, holders of bank paper – especially bonds – will be living in a different world. They will have a big incentive to monitor the riskiness of banks.