Tucker set to join calls for stricter controls on banks

Published on Wednesday 21 October 2009 21:10

THE Bank of England is heading for another clash with the government tonight when deputy governor Paul Tucker is expected to call for tougher measures to control exuberance in the banking sector.

He is likely to demand new instruments such as tighter capital and liquidity requirements, but will warn against creating a regulatory regime that could produce what he terms "perverse effects".

His intervention will follow Gordon Brown's refusal yesterday to break up the banks, which was demanded by Bank of England Governor Mervyn King in a speech in Edinburgh on Tuesday.

In what is predicted to be another hard-hitting speech, Tucker will deliver a lecture in London that will pick up on King's call for reform of the structure and regulation of banking.

In an interview yesterday with The Scotsman, Tucker said the Bank of England was trying to stimulate an international debate that tackles the big questions, "the biggest being whether banks are too big or, as Mervyn King said, too important, to fail".

He said: "Our banking sector has to be resilient. From somewhere in the world there will be periods of exuberance and we need instruments that can help to temper that exuberance."

He said that at such times "we need to ensure that the ceiling doesn't come crashing down and the question of regulation has to be part of that".

He said plans had to be put in place to prepare for the possibility of distress in the system. "We need to make the regulatory regime less pro-cyclical (prone to magnifying fluctuations in the economy]. But we need to ensure the regulatory regime doesn't have perverse effects.

"Unless we can rule out the possibility that the financial system will need capital support from governments ever again, then countries should think about what kind of framework we want in place ... and where the costs of such intervention fall."

Tucker has previously said that once a crisis has passed, the costs incurred by a government should be passed to the banking system rather than the taxpayer.

He sidestepped a question about whether HBOS should have been allowed to fail, going only so far as to say that the special resolution regime now in place under the Banking Act would allow banks and building societies to fail in an orderly way. It was used for the first time in the collapse of Dunfermline Building Society.

However, he said that in the circumstances in which HBOS found itself, failure of the bank would have had "catastrophic consequences for confidence in the UK".

On the economy, he said that if it was deemed necessary to increase quantitative easing beyond the 200 billion proposed under the current scheme then "it would be possible and it would happen".

But he said the economy now appeared to be on a path to recovery. "The great challenge now is that for some considerable time it will be hard to tell whether we face anaemic growth or if we are facing above-trend growth.

"If we have anaemic growth there will be more layoffs, more cutbacks, more scrapping of investment. A great deal will depend on the rest of the world. Asia has recovered quite strongly, the US is in a better position.

"Another area of uncertainty is the extent to which households will want to save more.

"A third question is how much the banking system will be prepared to meet rising demand for credit as the economy recovers.

"Bank lending growth has been weak. How much is that due to restrictive supply and how much down to low demand?

"A brighter spot has been the strength of the capital markets.

"A number of large companies across Europe, UK and the US have been able to issue bonds and equity which has strengthened their balance sheets. They have been using the proceeds to repay bank debt, which also strengthens bank balance sheets and allows them to lend to SMEs. So it has not been all bad."

He said lending growth from the banks had been weak, though anecdotal evidence was mixed. "Many companies feel they are getting a raw deal from the banks, but one definitely meets companies that say the banks are out there again. Frankly, no-one can speak with conviction in either direction."

Door open for fresh quantitative easing

BANK of England policymakers are divided over the outlook for inflation, and the door is open to further quantitative easing as the economy struggles out of recession, writes Scott Reid.

Minutes of October's meeting of the monetary policy committee (MPC), published yesterday, showed the nine members voted unanimously to keep interest rates on hold, and leave the Bank's asset purchase programme at 175 billion.

The minutes also highlighted "differences of view" on the inflation outlook, and members warned of potential hefty losses in the banking sector.

The MPC discussed recent evidence of a much-needed easing in business borrowing conditions and unemployment growth levels, but cautioned that it was unclear if this was a temporary improvement.

Sterling rose against the euro and the dollar, and gilt futures extended losses, after the minutes were released, which traders interpreted as making a further extension of the quantitative easing programme in November less likely.

The Bank raised its money-boosting programme by 50bn to 175bn in August, although Governor Mervyn King and two other policymakers had argued for a 75bn increase.

Last month's minutes revealed that King still thought a larger increase in QE could be justified. October's minutes made no mention of this.

Colin Ellis, an economist at Daiwa Securities, said: "It does look like a bit of a signal they're not going to do anything in November.

"It's not so much the 9-0 vote as dropping the line that King felt the case for a bigger expansion was justified."

However, Howard Archer, chief economist at IHS Global Insight, said there remained a "distinct possibility" that QE could still be raised to 200bn.

That view was echoed by Hetal Mehta, senior economic adviser to the Ernst & Young Item Club.

"Despite the unanimous vote, differing views on the economic outlook means there is still a chance that the quantitative easing programme will be expanded," she said.

The minutes come ahead of tomorrow's eagerly-awaited GDP estimates. It is expected they could show the UK economy moving out of recessionary territory in the third quarter.