wholesale creditors have been bailed out too. the need for such support operations was evident if complete systemic collapse was to be averted. but it does raise big questions looking ahead – of fairness and of incentives. once more, we need some principles for what are in effect official capital of last resort ( coflr ) operations. one possible starting point is how central banks have learned to think about bespoke liquidity - support operations, so called emergency liquidity assistance. after explicitly recognising that occasionally liquidity support operations can end up providing de facto risk capital if the recipient deteriorates, the late eddie george offered some thoughts on this in 1993 ; 9 “ central banks are not in the business of providing public subsidy to private “ the pursuit of financial stability ”, lse lecture by the late eddie george, bank of england quarterly bulletin, 1997 ; and mervyn king ’ s september 2007 letter to the treasury select committee, “ turmoil in financial markets : what can central banks do? ” shareholders. if we do provide support, we will try to structure it so that any losses fall first on the shareholders and any benefits come first to us. and any support we provide will be on terms that are as penal as we can make them, without precipitating the collapse we are trying to avoid … … … we look for a clean exit. the company may be required to run down or restructure its operations, under our surveillance, to the point where it can do without our support. we aim to protect the system, not to keep in being unviable banking capacity …... ” and, paraphrasing mervyn king in 2007 : “ if the [ authorities ] underwrite any [ risk ] that threatens to damage the economy as a whole, it encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their problems will be insured ex post. ” that provides a useful context for the debate about whether the cost of bailouts can somehow be recovered from the industry. compared with a year ago, a number of ideas are now in circulation. one possibility is to establish a fund in advance. another is to raise a levy on the surviving banks. an argument in favour of the former is that it would raise contributions from risky banks before they fail. and it would allow the levies to be related to the size of their uninsured creditors, as some in the

too – that serious distress in the banking system deepens an economic downturn and so impairs pretty well all asset values. by taking a hit in one part of their portfolio by providing equity protection to banks, institutions might well be able to support the value of their investments more widely. and the trigger for conversion from debt into equity could be at a margin of comfort away from true catastrophe ; say, a percentage point or so above the minimum regulatory capital ratio. of course, this would entail a structural shift over time in investment portfolios. but the system might be able to manage that adjustment. after all, it managed the all together less desirable adjustment to the development of the existing hybrid capital markets. but demand for contingent capital is, inevitably, uncertain at this stage. as are the terms on which it will be provided. we welcome the growing private sector focus on this. king mervyn a. ( 2009 ), “ speech by mervyn king, governor ” to scottish business organisations, edinburgh, october 2009. see also tucker p m w ( 2009a ), “ remarks by paul tucker ”, panel session at the turner review conference, london, march 2009 ( pp. 5 ) and tucker p m w ( 2009b ), “ the repertoire of official sector interventions in the financial system : last resort lending, market - making, and capital ”, bank of japan ’ s 2009 international conference, tokyo, may 2009 ( pp. 19 ). in the academic community, the idea was aired in “ an expedited resolution mechanism for distressed financial firms : regulatory hybrid securities ”, squam lake working group on financial regulation, april 2009, council on foreign relations. dudley, william c. “ remarks by william dudley ” at the institute of international bankers membership luncheon, new york city, october 2009. resolution of bank failures if recovery plans prove wanting, then distressed banks need to be “ resolved ” – laid to rest, but without undermining crucial economic services. sometimes the best course will be a straightforward, whole - bank liquidation, with retail depositors receiving a payout from the insurance fund. but, alternatively, resolution can involve selling the deposit book – and so the vital payments services – to another bank. good assets might go with the deposits, or be transferred elsewhere. bad ( or at least unsaleable ) assets go into run off. choosing the best course is central to effective resolution planning. to split up and transfer the different parts of a bank