BANK of England deputy governor Paul Tucker warned the City’s largest lenders yesterday that they should guard against another potentially huge crash in global financial markets.
Tucker, a leading candidate to replace governor Sir Mervyn King at the top of Threadneedle Street next year, was addressing the British Bankers’ Association (BBA) annual conference in London.
“There is still a tangible probability, not a high probability, that the worst may still be ahead,” Tucker warned the assembled bankers.
The Basel regulations, intended to make the international financial sector safer, “are not calibrated for the kind of end of the world risks that lie within the realms of the possible at the moment,” he added.
Tucker put the financial crisis down to a “toxic mix” of “distorted incentives, myopia, complexity, and easy global monetary conditions”.
Speaking on the challenges of steering the post-crisis industry, Tucker suggested that authorities could force lenders to pay senior bankers in subordinated debt.
In the event of a bank going bust, subordinate debt is paid only after other more senior debt holders have been satisfied, although before shareholders see any return.
“Having managers exposed to instruments whose value depends on the survival of their firm would give them a healthy incentive to maintain a safe and sound bank,” Tucker said.
The authorities also need to review pay structures for desk level bankers, Tucker added, in order to “make it less easy to get rich quick irrespective of the quality of business transacted.”
In the week that incoming regulators – the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) – outlined their plans, Tucker praised the new so called Twin Peaks supervisory structure.
“The reforms will finally give London a dedicated securities regulator a quarter century after the Big Bang that made it so necessary,” Tucker said.
“The FCA’s approach to enforcement will need to preserve – and, where necessary, restore – honesty in a market community for which side-stepping rules and principles has become too close to being part and parcel of commercial life.”