And any support we provide will be on terms that are as penal as we can make them, without precipitating the collapse we are trying to avoid ……… We look for a clean exit. The company may be required to run down or restructure its operations, under our surveillance, to the point where it can do without our support. We aim to protect the system, not to keep in being unviable banking capacity …...” And, paraphrasing Mervyn King in 2007: “if the [authorities] underwrite any [risk] that threatens to damage the economy as a whole, it encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their problems will be insured ex post.” That provides a useful context for the debate about whether the cost of bailouts can somehow be recovered from the industry. Compared with a year ago, a number of ideas are now in circulation. One possibility is to establish a fund in advance. Another is to raise a levy on the surviving banks. An argument in favour of the former is that it would raise contributions from risky banks before they fail. And it would allow the levies to be related to the size of their uninsured creditors, as some in the US have suggested. 10 But I do just wonder whether it would be realistic to raise, and over the decades sustain, a sufficiently large fund.
And the trigger for conversion from debt into equity could be at a margin of comfort away from true catastrophe; say, a percentage point or so above the minimum regulatory capital ratio. Of course, this would entail a structural shift over time in investment portfolios. But the system might be able to manage that adjustment. After all, it managed the all together less desirable adjustment to the development of the existing hybrid capital markets. But demand for contingent capital is, inevitably, uncertain at this stage. As are the terms on which it will be provided. We welcome the growing private sector focus on this. 4  King Mervyn A. (2009), “Speech by Mervyn King, Governor” to Scottish Business Organisations, Edinburgh, October 2009. See also Tucker P M W (2009a), “Remarks by Paul Tucker”, Panel session at the Turner Review Conference, London, March 2009 (pp. 5) and Tucker P M W (2009b), “The repertoire of official sector interventions in the financial system: last resort lending, market-making, and capital”, Bank of Japan’s 2009 International Conference, Tokyo, May 2009 (pp. 19). In the academic community, the idea was aired in “An Expedited Resolution Mechanism for Distressed Financial Firms: Regulatory Hybrid Securities”, Squam Lake Working Group on Financial Regulation, April 2009, Council on Foreign Relations. Dudley, William C. (2009) “Remarks by William Dudley” at the Institute of International Bankers Membership Luncheon, New York City, October 2009.