Friendly fire

23 October 2009 By George Hay Follow @gfhay

BoE deputy Paul Tucker is keener on micro regulation of banks as a way to stop a future crisis than his boss, Mervyn King, who wants to break banks up. Tucker s ideas have merit. But the finetuning required to make them work may be more than regulators can actually deliver.

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Regulators should vary the riskweighting applied to different types of borrowing in order to prevent future bubbles, Paul Tucker, one of the Bank of England's deputy governors said in a speech at Barclays Bank on Thursday.

Tucker argued that this would be a better approach than varying minimum capital ratios through the cycle. A single capital levy might undermine growth in sectors that were not booming, while not going far enough to rein in credit bubbles in sectors that were. By contrast, adjusting riskweights to particular classes of borrower would address specific credit bubbles where they arose.

Tucker also challenged the idea that it would be pointless to introduce such measures unilaterally. The BoE deputy admitted that, without global coordination, it would be hard to stop credit bubbles emerging – as borrowers could just shop around to banks based in other jurisdictions. But he maintained that there would still be a benefit to the UK because its domestic banks would then be less exposed to the subsequent bust.

Tucker said regulators faced a choice over whether to overhaul the regulatory regime or directly alter the structure of the banking system. He said his thoughts on controlling bubbles were predicated on something like the existing structure of the banking system persisting. These comments contrasted with a speech made by Mervyn King, the BoE's governor, in which he called for banks to be broken up with their utility operations being separated from their trading sides.

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