Speaking at the Bank of Japan International Conference in Tokyo, Bank of England deputy governor Paul Tucker proposed solutions to any future shocks in the banking sector. He says one way to avoid the Government paying for banks’ failure is to install a ‘capital of last resort’ deposit insurance scheme.
Tucker says: “It might be conceivable to establish, over the medium term, a regime where the eventual cost of any bailout would be allocated back to the banking system itself rather than to the general taxpayer.”
Tucker argued that if a public equity injection was necessary in order to preserve the banking system in the future, Government could provide the support, but with a right to claim back the eventual cost from an increased ‘insurance’ levy on the banking system after the crisis had passed.
He says: “The authorities would absorb the risk to the banking system for a temporary period, but would eventually be repaid by the system. Banks could take that into account in planning their businesses; and might, arguably, have an incentive during peacetime to monitor the threats that their peers posed to stability.”
He also says the scheme could be pre-funded through deposit insurance or liquidity insurance.
He says: “This is obviously difficult territory, and I air these ideas not so much a proposal but in the hope of stimulating serious thinking about what a ‘capital of last resort’ regime might look like.”