The deputy governor of the Bank of England has declared an end to the era of taxpayer bail-outs for the world’s giant lenders.
Almost five years to the day since the collapse of Lehman Brothers triggered the worst financial crisis since the 1930s, Paul Tucker claimed that America’s biggest banks are now in a position to go bust without state intervention.
Britain and the rest of Europe are “not far behind” but draft laws still need to be ratified. In future, the cost of a bank bail out will be borne by its investors rather than nurses and teachers, Mr Tucker said.
Five years ago this month, Britain rescued its biggest lenders with a series of cash injections and state guarantees worth a total of more than £1 trillion at the peak of the crisis.
Some £65bn was ploughed directly into Royal Bank of Scotland and Lloyds Banking Group to ensure Britain’s payment systems stayed open and the country’s vital financial infrastructure continued to work.
In his valedictory comments before leaving the Bank next week, Mr Tucker said that years of root and branch reforms since the crisis had finally paid off.
“I cannot see how the US administration could persuade Congress to provide taxpayer support to some of the biggest US banks,” he said. “I don‟t mean it would be completely smooth right now; it would be smoother in a year or so as more progress is made. But in extremis, it could be done now.
“Europe has not yet reached the same point, but is not far behind. The necessary legislative regime is close to completion.”
Speaking alongside Mr Tucker at an Institute for International Finance panel discussion in Washington, Arthur Murton, director of the Federal Deposit Insurance Corporation – the US body in charge of financial stability, said: “I would agree that we could. Would we prefer it would happen in a year from now? Yes. But I would say that we are prepared. We are in a position to execute it.”
Resolving the issue of ‘too big to fail” global banks is vital for the UK, where Barclays, Royal Bank of Scotland and HSBC are each almost as large as the entire British economy. Had one been left to collapse in the crisis like Lehman Brothers, the damage to the UK would have been even more severe than the recent recession.
Britain is still trying to recover some of the economic ground lost since 2008. The economy remains 3.2pc smaller than it’s pre-crisis peak, according to official data.
Under the “bail in” arrangements regulators have been developing, a failing bank would be seized by the regulator over a weekend, shareholders would be wiped out and debt investors forced to bear big losses to recapitalise the balance sheet, and it would open again on the Monday.
The process would ensure the lender remained solvent, thereby avoiding a catastrophic loss of confidence that would trigger the kind of bank run suffered by Northern Rock.
Mr Tucker said that fixing the “too big to fail” question was “the single most important issue in global finance”.
The world’s giant banks remain vulnerable despite the hundreds of billions of dollars that have been raised since the crisis to armour-plate their balance sheets. Last week, JP Morgan, the world’s biggest lender, made a loss in the June to September period after setting aside £6bn for fines and compensation.
Next year, Europe’s banks will be under the microscope when regulators run a rule over the quality of their loan books. Several are expected to have to ask shareholders for funds or force losses on debt investors in what would be the first use of the “bail-in” principle.
National governments are also preparing to step in with emergency funds if necessary.
Benoit Coure, a member of the executive board of the European Central Bank, said: “It will be very serious. Any capital shortfall will have to be reached primarily by shareholders and, if necessary, bail in of debt holders. There is also, in the last resort, a need for public backstops.”
Mr Tucker said the remaining obstacle to resolving “too big to fail” was regulatory willpower.
“The authorities will have no excuse if they don‟t solve the problem through resolution regimes and reforms. The necessary technology is clear. The necessary restructuring of firms is clear. The necessary degrees and forms of cross-border co-operation are clear. It is a matter of: just do it,” he said.
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