Andrew Haldane, executive director for financial stability at the Bank of England, said there is a “governance fault-line” whereby ownership and control rights of a bank are exercised by shareholders, but equity has become a “vanishingly small fraction of their balance sheet”.
“That calls for fundamental reform,” Haldane said in his Wincott Annual Memorial Lecture in London.
Haldane, who is also a member of the Bank’s Financial Policy Committee, which is set to play a key role in shaping how banks are supervised, made several suggestions, including ending the tax advantage of debt in favour of a tax advantage for equity to bolster capital cushions.
He also said hybrid debt, known as contingent capital, could be used but only if its conversion from debt to equity is early and non-discretionary so that it is “an early health scare for a bank and not the last rites”.
He also said the “too big to fail” issue needs urgent attention, given the huge implied subsidies involved.
“The scale of subsidy suggests there is a considerable distance to travel before debtor discipline could be fully effective in checking risk-taking,” Haldane said.