paul tucker : resolution of large and complex financial institutions – the big issues remarks by mr paul tucker, deputy governor for financial stability at the bank of england, at the european commission conference “ building a crisis management framework for the internal market ”, brussels, 19 march 2010. * * * many thanks for input to mark adams, andrew bailey, peter brierley, geoffrey davies and andrew hewitt, and to financial stability board colleagues for discussions on resolution issues. for background work to michael grady and for secretarial support to sandra bannister and cheryl feeney. i am delighted to be at today ’ s conference, the first major conference under commissioner barnier. as many colleagues here will know, i chair the financial stability board ’ s working group on cross - border crisis management. but my remarks today are offered in a personal capacity, albeit drawing on the international dialogue. the conference is very well timed given the commission ’ s work on a possible eu directive on resolution regimes. an increasing number of national authorities have already established or are prospectively establishing special resolution regimes for the resolution of commercial banks, enabling the transfer of deposits and good assets to another bank, with bad assets and other creditor claims going into an insolvency process. at a high level of generality, a distressed bank is split into a continuing good bank, typically acquired by a healthy bank ; and a gone - concern bad bank, which goes into administration. insured deposits travel with the “ good bank ”. all other creditors typically travel with the “ bad bank ” and become claimants in the insolvency. we can be confident that this will help to buttress stability. encouragement from the eu to all members states to establish such regimes would be really useful. but we also know that, of itself, this is insufficient. it cannot cope with distressed lcfis ( “ large and complex financial institutions ” ) without injections of public money. in the first place, every country having its own special resolution regime does not solve the problem of resolving cross - border banking groups. second, such regimes cannot cope with investment banking, whether national or global, if a buyer cannot be found. even for a ( hypothetical ) lcfi operating entirely within a single jurisdiction, with all of its counterparties, customers and contracts domiciled there, a standard resolution regime could not effect an orderly run down of, for example, a massive, complex derivatives portfolio. putting over - the - counter derivatives though central counterparties

to say that none of them yet seems to provide a completely convincing explanation. and although different mpc members place different weights on the possible explanations, we all agree that there is considerable uncertainty as to how productivity will evolve as the recovery proceeds. unemployment is certainly not a perfect guide to slack in the labour market. for instance, the recent increase in the number of workers wanting to work more hours suggests it understates the absolute level of slack1. but it is not unreasonable to expect this margin of “ potential hours worked ” to move in line with unemployment. and, unlike in the 1980s, we have not seen a substantial movement in the labour force participation rate, which suggests that the number of discouraged workers has not risen markedly. so overall, changes in the unemployment rate are, we think, likely to provide a reasonable guide to the evolution of labour market slack. now consider what will happen if the weak productivity performance of recent years is simply a consequence of the weak state of demand and so reverses as the recovery proceeds. in that case, businesses will be able to supply the extra demand without greatly expanding their workforces and unemployment will be slow to fall. in these circumstances, it is indeed appropriate to keep monetary policy loose as potential output is well above actual output. conversely, suppose that the financial crisis and subsequent recession has wrought lasting damage to productivity. in that case, unemployment is likely to fall faster as demand grows, meaning that unemployment will reach the 7 % threshold sooner. then it will be appropriate to tighten policy sooner in this case, as potential output will be lower. the only case where the linkage of policy to unemployment is potentially problematic is where there is scope for productivity to increase as demand recovers, but for some reason firms take on extra labour before the increase in productivity takes place. but this seems rather unlikely to me. in any case, it is important to realise that the 7 % threshold does not constitute a trigger for the mpc to raise bank rate. rather it represents a prompt for the committee to undertake a see bell, d n f and blanchflower, d g ( 2013 ) ‘ underemployment in the uk revisited ’, national institute economic review, no. 224. bis central bankers ’ speeches broad assessment of the prospects for demand, supply and inflation. if it appears that there is still a substantial degree of slack in the economy which can be absorbed without threatening the achievement of the 2 % inflation target in the medium term, then there will be