Paul Tucker, the Bank of England deputy governor, has partially backed European plans to give depositors greater legal protection in a move that threatens to pitch him against the Chancellor.
Europe is considering extending protection for “insured” deposits of up to £85,000 to all depositors. Last week, George Osborne attacked the plan, saying it could create “perverse incentives” in the markets.
In a speech to the INSOL International World Congress in The Hague yesterday, Mr Tucker said he supported moving some way towards the European proposal. “I can see a case for both insured and some uninsured depositors being preferred,” he said.
“That would help to provide some protection, beyond the deposit guarantee scheme, for users of the monetary services that banks provide; it could provide a small degree of protection against runs; and there could be an element of social justice in insulating, say, small firms and charities from the first line of loss.”
Mr Tucker’s intervention is significant because he is head of financial stability at the Bank and a leading force in reform of the global system. He acknowledged the “active debate in the EU” over the status of uninsured deposits and said it was now “the big issue”. He also pointed out that “in the US, all deposits are preferred”. An EU agreement is expected in June.
Last week, the Chancellor said: “You don’t want to have to bail-in uninsured depositors, we have to be careful we do not create perverse incentives.” He warned that bondholders could simply switch to deposits, making banks less easy to rescue in a crisis, and that changing the creditor hierarchy through preference could make it more expensive for banks to operate.
However, he added it “is something we should give further consideration to”.
Resolving “depositor preference” is critical because, in future, bank creditors will be forced to take losses to prevent another taxpayer bail-out. Deposits rank alongside senior creditors and so are equally liable for losses. The insurance scheme protects the first £85,000 of savings but the rest is at risk.
Preference on uninsured deposits would not exempt them from losses but would make it less likely as other bondholders would be wiped out first. The Government has pledged to adopt the Vickers recommendations that only “insured” deposits be protected, and legislation has been drafted to include the reform.
Mr Tucker stressed that “preference” should not extend to “very large, wholesale deposits at term maturities – for example, billions of pounds for six months”. He was speaking on the wider issue of ending the current “semi-socialised” system of taxpayer rescues.