paul tucker : developing an eu cross - border crisis management framework remarks by mr paul tucker, deputy governor for financial stability at the bank of england, at the eurofi financial forum, brussels, 30 september 2010. * * * thank you very much for inviting me to join you here today. it is terrific that the eu, and the commission in particular, have been taking resolution really seriously as part of the programme for reforming the financial system. this is a domestic issue, an eu - wide issue, and a global issue. in introducing this session of the conference i ’ ve got five points, and i ’ m going to try to be quite crisp on those five points once i have made an introductory comment about resolution regimes in general. it may be helpful to say a few words about what resolution is. resolution is what happens when we are in the “ last chance saloon ”. that is to say when supervision, however enhanced, has not prevented distress. when higher capital and liquidity requirements have proved insufficient. when any cocos or other instruments have been converted or written down but have proved insufficient to absorb the distressed firm ’ s losses, and so the institution is still teetering on the edge of failure. that is we are talking about the point at which all the usual remedies have been exhausted, and the authorities face a desperate choice between taxpayer bailout or chaotic liquidation unless special resolution tools are available. all those other, essential measures are about reducing the probability of distress. resolution is about coping when, notwithstanding those measures, we do face severe distress in a financial institution. the trigger for putting a financial firm into resolution should essentially be when the criteria for the authorisation of the bank ( or dealer, or whatever ) are no longer met, there is no reasonable prospect that they are going to be met in the future. which in practice, actually means that the institution is effectively insolvent or what amounts to insolvency. effective resolution regimes are designed to manage these situations. they are about making the private sector pay rather than making the taxpayer pay through the mediation of a public sector bailout when, because of the firm ’ s provision of critical services, we cannot afford simply to put it through a standard corporate bankruptcy procedure. against that background, i would make five points. first of all i would say that it is absolutely essential that each of the eu member states, and indeed all the countries in the world, should have a national resolution regime for conventional commercial banks. not

migrate to other parts of the system. it is, therefore, hugely welcome that the bill currently before parliament gives the fca a statutory objective of helping to preserve stability. 9 that is going to be important, for example, to contain any systemic risks stemming from shadow banking, such as money market funds, or from fault lines in the trading infrastructure or disclosure regimes. 10 sometimes a permanent fix will be needed. the fpc will be able to make recommendations to hmt to move the perimeter of microregulation, and to pra or fca to change their rules and policies. but sometimes it will be more a matter of choking off a transient burst of exuberance. even where market participants become aware of the potential risks, a collective action problem can impede their taking their foot off the accelerator. a telling experience in the run up to the crisis was of chief risk officers on wall street talking openly about a dilemma between what they called financial risk and business risk. on the one hand, the street was taking a lot of financial risk, which could end in tears. on the other hand, they were not certain that it would end in tears and they were worried that if they left the field too early, their customers would cross the street to their competition, destroying their franchise. 11 central banks can help to solve that collective action problem, as federal reserve board chairman mcchesney martin highlighted more than half a century ago when he explained our role as being to take away the punchbowl when the party is getting going. chairman martin was talking about monetary policy, and monetary policymakers do sometimes need to take the long view. but often it will fall instead to the fpc temporarily to adjust capital or liquidity or margin requirements to build system resilience and lean against the exuberance. when we reach that point, as we shall, turning down the music will be unpopular. that is why the current debates in the uk parliament about the bank of england ’ s new financial policy committee are so very important : in a word, legitimacy. concluding remarks when the financial tide goes out, it lays bare problems that had been gathering during the “ good ” times. work by the international central banking and regulatory community to make the single strategic objective of the fca will be to ensure that financial markets and markets for regulated financial services function well. that is supplemented by three operational objectives, including “ protecting and enhancing the integrity of the uk financial system ” which is in turn defined in the