Paul Tucker: Regimes for handling bank failures – redrawing the banking Social Contract Remarks by Mr Paul Tucker, Deputy Governor of the Bank of England, at the British Bankers’ Association Annual International Banking Conference “Restoring confidence – moving forward”, London, 30 June 2009. *  *  *  Thank you very much to the BBA for inviting me today. It is a real pleasure to be here when so much is being debated about the future of the financial system. I’d like to use the occasion to develop some of the emerging thoughts of the international official sector on the environment – the “rules of the game” or Social Contract – within which banks will need to operate in future. Banks’ liquidity risks and the banking Social Contract The defining characteristic of banks lies in the liquidity services you provide to the economy, and in the consequent liquidity risks that you run. History shows that banks are inherently fragile. Banks are vulnerable to deposit runs. The current crisis has revealed, if it needed to be, that the same goes for money market funds. And it turned out that big securities dealers had effectively been turned into quasi banks by funding themselves partly from balances held by prime-brokerage hedge-fund clients; balances that could be withdrawn on demand, and in some cases were. So what I have to say is about the economic substance of banking liquidity risk, not its legal form.
The most well-known e-payment company is PayPal, which is registered in Luxembourg, but which is active around the world. Almost exactly ten years ago Stefan Ingves, the current Governor of the Riksbank, held a speech on the theme “Electronic money from a central bank perspective”. He then said that “the situation today on the e-money front can, put briefly, be described as there being a lot  5  In 2006, 85 per cent of all giro transfers and other credit transfers were made electronically, the remainder were paper-based. In terms of value, 96 per cent of these transactions were made electronically. Sveriges Riksbank. 4  BIS Review 16/2008  happening at different places in the world, although a breakthrough on a broad front is still in the future”. This summary can probably said to still hold today. 6 But not all development is tied to e-money. Mobile phones are now also used to make payments. For example, we can pay our bus and underground journeys by sending a text message. A few seconds later we receive a text message back from the operator, confirming that a ticket has been purchased and that it can be shown to the driver or conductor. If one has a prepaid card the cost is drawn directly, otherwise it will be put on the telephone bill. There are shops that have begun to use smart cards.