There is nowhere to hide. Quietly maintaining a policy of bailing out banks is not a free option for governments and their taxpayers. Anyone tempted to argue against pursuing the resolution policy agenda would effectively be wanting to increase the (contingent) burden on the taxpayer. That would be liable to increase the pressure for fiscal austerity. As well as avoiding bailout by taxpayers, we must avoid liquidation – putting a failed bank through a standard bankruptcy procedure. That brings chaos. Resolution regimes are a way for the authorities to avoid the direct hit to the public finances while at the same time containing disorder in the financial system. That can lead to a much better financial system, with stronger market discipline and so less stability-threatening imprudence. Contemplating this, some commentators are concerned that one particular resolution tool – commonly known as bail-in – entails losses for bond holders. That is a misthink. All resolution tools put losses on to debt holders and creditors. Because that is the only place they can go. Bail-in is just one technique for delivering that. Its distinguishing characteristic is that it applies losses up front based upon a valuation rather than at the end of a liquidation of assets. As such, it prospectively avoids an unnecessary destruction of value. But there is no silver bullet. We need resolution tools that work in different contexts for different types of bank/dealer. That means having a rich set of tools but with a common trigger for going into resolution.
Paul Tucker: Resolution – a progress report Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Institute for Law and Finance Conference, Frankfurt, 3 May 2012. All speeches are available online at www.bankofengland.co.uk/publications/speeches. *  *  *  Thank you very much for inviting me to join this important conference. The EU have made a massive contribution to global planning for resolution regimes to address the fundamental problem of Too Big To Fail, inputting very significantly to the G20 Financial Stability Board’s Key Attributes for Resolution Regimes. It comes as no surprise, therefore, that the EU is committed to implementing that International Standard, via a Directive. As Chair of the FSB’s Resolution Steering Group, I thought the most useful thing I could do this morning is to give a brief progress report, and also to air some emerging thoughts on how to operationalise the FSB’s high policy. Preliminaries: what this is about For those who hesitate to grasp the nettle of implementing resolution regimes, I want to stress that the genie is out of the bottle. While myopia gripped the financial markets in the years leading up to the crisis, they are now seized of the risks on bank balance sheets. That will be reflected in the prices of the debt of those who bear that risk. If the risk in banking is not incorporated into the yields of bonds issued by banks themselves, then it will be reflected in higher sovereign borrowing costs.