In a paper published yesterday, Paul Fisher, the Bank's executive director for markets, disclosed that "some banks have told us that they think they should not be required to hold capital and liquidity to deal with such extreme tail events – leaving the public sector to be the capital provider of last resort".
His comments clash with the public statements of bankers who claim lenders should not be a burden on the taxpayer.
Earlier this year, Bob Diamond, Barclays' chief executive, told the Treasury Select Committee: "It is not acceptable for taxpayers to bail out banks," adding that "badly managed" lenders should be allowed to fail. There is no suggestion that Mr Diamond is among those to whom Mr Fisher was referring.
Mr Fisher was speaking as banks have stepped up their campaign against structural reforms proposed by the Independent Commission on Banking to prevent a repeat of the crisis.
He claimed the crisis was partially caused because bank bosses "seemed to have had no grasp of how risky their exposures really were". The reason was the weakness of stress tests, which looked at each bank in isolation and failed to "make consistent assumptions about ... general market conditions".
In future, he proposed conducting "extreme stress tests" – including potentially testing banks to destruction.
"At some level, there is always a stress scenario that forces bankruptcy. Perhaps the greatest sin in the years preceding the financial crisis was blatantly ignoring what really would happen if the 'unthinkable' ... actually happened."
Directors’ reluctance to bullet-proof their banks against extreme risks, however, “leads directly to moral hazard and excessive risk-taking”, Mr Fisher said.
“Tail events seem to happen far more often than people assume and if the risks were properly acknowledged at the outset, many structures would be avoided or risks re-structured so as to limit losses in the event of tail risks. That has obvious implications for financial stability.”
His comments came as Andrew Sentance, a former fellow rate-setter at the Bank, backed the Government’s austerity measures and repeated his call for rate rises.
“I think the broad direction of government fiscal policy is correct,” he told the BBC. “To show the markets that the public finances are under control, we’ve got to stick with the Government plan.”
He added that an interest rate rise would “perhaps mitigate a bit” the inflation that is being imported due to the weak pound.
By Philip Aldrick taken from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8736081/Banks-still-expect-taxpayer-to-pay-for-their-failure.html
"At some level, there is always a stress scenario that forces bankruptcy. Perhaps the greatest sin in the years preceding the financial crisis was blatantly ignoring what really would happen if the 'unthinkable' ... actually happened."
Directors’ reluctance to bullet-proof their banks against extreme risks, however, “leads directly to moral hazard and excessive risk-taking”, Mr Fisher said.
“Tail events seem to happen far more often than people assume and if the risks were properly acknowledged at the outset, many structures would be avoided or risks re-structured so as to limit losses in the event of tail risks. That has obvious implications for financial stability.”
His comments came as Andrew Sentance, a former fellow rate-setter at the Bank, backed the Government’s austerity measures and repeated his call for rate rises.
“I think the broad direction of government fiscal policy is correct,” he told the BBC. “To show the markets that the public finances are under control, we’ve got to stick with the Government plan.”
He added that an interest rate rise would “perhaps mitigate a bit” the inflation that is being imported due to the weak pound.
By Philip Aldrick taken from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8736081/Banks-still-expect-taxpayer-to-pay-for-their-failure.html
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