Paul Tucker: Competition, the pressure for returns, and stability1 Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the British Bankers’ Association Annual Banking Conference, London, 17 October 2012. *  *  *  Introduction Propelled by a deep crisis in the financial system, the international authorities are overhauling the “rules of the game” for global finance. The changes are profound. But it is worth stressing that the goal is not to abolish risk or risk-taking. We need to find broadly the right balance between, on the one hand, safety and, on the other hand, the contribution that sound and honest finance can make to economic prosperity. In striking that balance, international policymakers have maintained three beliefs: •  risk is an intrinsic and unavoidable part of the (monetary) services that banks provide to the economy, just as risk is intrinsic to the businesses that borrow from banks;  •  competition in finance is good, although the authorities need to be mindful that the drive for superior headline returns can contribute to excessive risk in the system as a whole;  •  a global financial system must be maintained, but the authorities need to contain the way that financial problems can be transmitted easily from one part of the globe to others. In short, the things society wants from finance come with risks attached. History contains repeated episodes of herd-like chasing of high headline returns during exuberant phases of the credit cycle.
I shall confine myself to a tour of some of the international and domestic reforms of banking itself, highlighting a few questions for debate along the way. Expose debt holders to losses: resolution regimes First and foremost, we need holders of bank debt to be exposed to losses when banks fail. This is not some macho thing. If banks’ cost of debt finance does not vary with the risks they are taking, what should be an important check on the tendency to excess is badly diluted. For the financial system to be safe, we need to be able to sort out distressed commercial banking and investment banking operations without massive disturbances to the provision of services and without taxpayer solvency support. That, in a nutshell, is what is meant by making a firm “resolvable”. The economy’s payments system obviously needs commercial banks that can be resolved in an orderly way. But, in addition, the capital markets need sound intermediaries which, if they become distressed, can expire safely or whose viable parts can be resurrected. I stress that because we need to do more than ensure that the most critical services are preserved come what may. We need also to avoid the massive destruction of value that occurs when, under standard bankruptcy proceedings, a trading portfolio is liquidated in stressed market conditions and without sensitivity to spillovers to the rest of the system. We need resilient capital markets.