Allowing large banks to fail without the massive disruption seen when Lehman Brothers collapsed five years ago this week has been the ambition of policymakers after governments had to rescue many lenders in the 2007-2009 financial crisis.
Such banks, believing governments cannot afford the harm to economies of letting them go under, are tempted to take bigger risks and unfairly benefit from cheaper funding as investors know taxpayers would always rescue them, policymakers have said.
“Were some of the biggest Wall St firms to fail this week... I think it would be very hard for the president and US treasury secretary to persuade the Congress to commit taxpayers’ money,” Tucker yesterday told a London School of Economics seminar.
This is because Congress has given the US administration powers to wind down big financial firms, though it would not be smooth or without ripples, he said. “The capital structure of big firms is such that it could be done on a global basis, and I don’t think I am alone in thinking that in the official sector,” said Tucker, who steps down shortly.
“I think it could be done now under duress by the American authorities with the authorities elsewhere stepping aside. I don’t think that is the position in Europe.”
The EU has yet to approve a law to give supervisors tools to break up and close failed banks.
Tucker, who chairs a working group on global coordination on winding down banks at the Financial Stability Board (FSB), said big lenders will need to reorganise themselves over the next few years to “make themselves more conducive” to using these tools.
Work by the FSB over the next year or two will reduce the ripples and mess from a banking failure even further, he said. The Bank of England would be prepared to “step aside” and allow the US to wind down a global bank that had operations in London, he said. He took a swipe at industry lobbying on new rules, saying the banking sector could be more helpful in the process.