Former Bank of England deputy governor Paul Tucker has called for a radical overhaul of how banks are funded so they could withstand a 100 per cent deposit run without following Silicon Valley Bank, Credit Suisse, Signature Bank and First Republic into finance’s graveyard.
The recent spate of bank collapses alarmed regulators by showing how quickly a bank could be bled dry by a run carried out over apps and online transfers rather than a Northern Rock-style run where people queued on the streets.
Silicon Valley Bank, for example, lost $42bn, or a quarter of its entire deposit book, in a single day in a collapse described by Bank of England governor Andrew Bailey as the “fastest passage from health to death since Barings” in 1995.
The US and the UK are both now considering enhancing their deposit guarantee schemes to reduce the risk of future bank runs, while global regulators are weighing forcing banks to prepare for faster bank runs by requiring them to hold more highly liquid assets.
Tucker, who was deputy governor until late 2013 and is now an author and fellow at Harvard, told the Financial Times that central banks should act decisively to prevent bank runs by requiring lenders to keep enough collateral with central banks so they could honour demands for 100 per cent of their short-term deposits in a single day.
The collateral would take the form of high-quality government bonds, portfolios of loans or other assets accepted by central banks, who would assess the collateral’s value daily, and ask for more if the assets’ value had fallen too far.
The central bank would then undertake to provide cash in return for that collateral as soon as a lender needed it.
“It would mean that, subject to a bank being fundamentally insolvent, central banks could 100 per cent cover a run,” said Tucker, adding that the reform that he and former BoE governor Mervyn King first aired in the mid- 2010s was more pressing in light of recent events.
If enacted, the proposal would end banks’ ability to use assets tied to their banking businesses as collateral to finance other activities, including trading, though large UK banks’ capacity to do that is already limited by ringfencing.
Tucker said the proposals would not necessarily result in lower lending over an economic cycle, even though banks would be more constrained in how they invested depositors’ money. He added that central banks would not be taking on more risk so long as they “prudently require over-collateralisation and actively manage their potential exposures”.
“It could leave [central banks] with a lot less risk than now,” he added, describing how they would be able to see changes in the value of lenders’ government bond holdings and other assets in real time, which could ultimately help the public finances.
“At the moment, it seems the taxpayer still needs to come to the rescue even when a bank’s problems should be obvious (the US cases), or there was plenty of notice that decisive remedial action was needed (the Swiss case),” he added.
Tucker said the policy, which he thinks the BoE could adopt under its current powers, would ideally be done alongside international peers but “single countries should not be deterred from going it alone if others don’t adopt this policy.
“Although it’s not easy to go it alone, in the medium term it would pay off because the banking system would be less likely to collapse. Just imagine the benefits to Britain if, during 2007-09, our banks had stood out for their resilience when the rest of the international financial system was unravelling.”