Paul Tucker, deputy governor of the Bank of England, told MPs on Tuesday that Britain's banking system would not be safe until top bankers could acknowledge they were taking too many risks.
In his last appearance before the Treasury select committee of MPs after failing to clinch the top job of governor, Tucker also said that clearing houses – which stand behind billions of pounds of trading everyday – needed to be closely monitored.
European regulators have encouraged clearing houses, also known as central counterparties, to stand behind major transactions in the financial markets but Tucker said that these organisations were themselves becoming too important to fail. They should be run as non-for-profit organisations, he said.
"I don't subscribe to the view that banks are purely utilities; but central counterparties are purely utilities," said Tucker, who called for systems to be devised in the event that such a system collapsed.
Tucker is also concerned about leverage in the system. "We will not have a safe banking system until bankers go into work in the morning and say 'hell, my bank is overleveraged'."
He made his remarks amid a continuing debate about how to measure the risks of banks and calculate their leverage, a gauge of how much they can borrow in financial markets. Concerns about the leverage of Barclays forced the bank to conduct a £6bn cash call to bolster its leverage ratio to 3%.
The deputy governor is also concerned about leverage of the institutions in the so-called shadow banking system, a reference to institutions which embark on banking activities but are not formally regulated and sidestep the rules to keep away from direct regulation.
He said regulators should be able to set minimum margin requirements for derivatives contracts to influence the "degree of leverage in the shadow banking system".
Tucker, who is leaving to work in academia after failing to become governor of the Bank of England, had been called to give evidence about the plans to conduct annual stress tests of banks. He said the actual details of the tests to which banks are going to be subjected would not be published because they could "cheat" if they knew the scenarios being tested. He said, though, there was no perfect set of rules and that banks needed to be allowed to fail.
The Bank of England has been given back the power to regulate banks through the Prudential Regulation Authority after being told to focus on inflation by the Labour government after 1997. Tucker said the bank should have "retained a wider brief" than keeping a watch on inflation and ignoring systemic risk in the financial system before the crash.
guardian.co.uk © Guardian News and Media Limited 2010
image: © Ofer Deshe