Paul Tucker: Bank bailout law needs wider backing

PROPOSALS for a European Union (EU) law to protect taxpayers from having to bail out troubled banks would need global support to work effectively, Bank of England deputy governor Paul Tucker has warned.

Paul Tucker: Wider backing needed. Picture: Getty/AFP

Speaking in the Netherlands, Tucker said there had been “marked convergence” recently on a global approach to winding down banks which typically have operations in many countries.

But he said more political impetus was needed as it would still be a “nightmare” to wind down a big bank, he added.

If approved, the EU law on bank recovery and resolution is seen as a milestone towards a global system and help convince markets that governments were no longer willing to rescue “too-big-to-fail” lenders.

Since governments had to shore up banks during the 2007-9 financial crisis, regulators have wanted to stop markets assuming big banks would not be allowed to go out of business.

The EU law will have powers to force big banks to hold a cushion of bonds that can be converted into equity to shore itself up without taxpayer cash. Tucker said a discussion on such a cushion at the global level was still needed.

This “loss-absorbing” cushion should be equivalent to the amount of capital a lender holds in its capital buffer with an added margin for safety, he said.

The biggest banks will have to hold a core capital cushion of up to 9.5 per cent by 2019 though many are already at or above this level due to market and supervisory pressures.

Banks should not hold large amounts of bonds of other banks and nor should insurers hold chunks of bank debt, Tucker said. He backed the EU consensus that depositors with up to €100,000 (£85,000) in their account should not suffer losses in a bailout.