Speaking at the Barclays annual lecture yesterday, Bank of England deputy governor Paul Tucker said that the Bank would steer clear of affectively pricking future asset bubbles through fiscal policy.
He said: “[to control asset bubbles] A whole series of judgments would have to be made – whether the rate of credit growth seemed excessive, whether terms were overly lax, or whether the ‘bubble bursting’ would materially damage banks.
“Rapid growth in debt does not of itself signify over indebtedness and default does not necessarily materially impair lenders’ resilience.”
Tucker said instead it would be more prudent for the Bank to control boom and bust through “strengthening the resilience of the banking system during credit booms”.
Tucker also seemed to question some of the recent speech of governor Mervyn King by refuting the need to separate the banking system so as to avoid the situation where banks are “too big to fail”.
Tucker said: “Personally, I do not much like the notion of a list of ‘systemically important firms’ because, as a previous generation of policymakers taught us, what proves to be systemic depends so very heavily on the circumstances.”
He used the examples of Barings Bank being allowed to fail but the secondary banks of the 1970s and early 1990s being saved – he argued that size is not the issue rather how failing institutions affect the banking sector as a whole.
Tucker also reiterated the calls of FSA chairman Lord Turner in creating ‘living wills’ for financial institutions, but admitted the process would be difficult.
He said: There will quite probably be hard questions about the organisation of some banks, about which services needed to be maintained and about how losses can in the future credibly be made to fall on wholesale creditors and, maybe, about the issues confronting burden sharing amongst national authorities.”
The deputy governor also questioned the strength of the UK financial system. He said: “I fear that we may not be much clearer about the general trends in demand until at least late spring/early summer next year. I doubt it will be clear before then whether or not the financial system is sufficiently recovered to support what may well prove to be a more credit-intensive phase of cyclical recovery.”