By Chris Dorrell
Banks should be required to keep enough collateral with the central bank to cover all of their short-term deposits, an ex-Bank of England wonk has said.
Speaking to the Financial Times, former Bank of England Deputy Governor Paul Tucker said “it would mean that, subject to a bank being fundamentally insolvent, central banks could 100 per cent cover a run.”
Tucker suggested the collateral could take the form of government bonds and other high quality assets. The central bank would monitor the value of the collateral, demanding more if the assets’ value fell too far.
If a bank faced outflows, the central bank would make cash available in return for the collateral.
Tucker, who is now a fellow at Harvard, said central banks would not be taking on more risk if they “prudently require over-collateralisation and actively manage their potential exposures.”
“It could leave [central banks] with a lot less risk than now,” he said. The ability to keep an eye on the fluctuating value of banks’ assets would also have potential benefits to financial stability, he said.
“At the moment, it seems the taxpayer still needs to come to the rescue even when a bank’s problems should be obvious (the US cases), or there was plenty of notice that decisive remedial action was needed (the Swiss case).”
The comments come as regulators and senior figures in the banking world attempt to adjust protections to reflect the risks posed by new technologies.
The collapse of Silicon Valley Bank (SVB) demonstrated the power of social media and online banking to endanger the financial sector. SVB saw $42bn pulled in a single day, the largest bank run in history.
Last week Antony Jenkins, formerly chief executive of Barclays, told City AM new technologies and social media have the power to “turbocharge” bank runs but warned it would be difficult to fix those issues without threatening the benefits of new technologies.
Regulators in the UK are reportedly considering updating the Financial Services Compensation Scheme (FSCS) to shore up the system. Global regulators have also raised the possibility of tighter liquidity rules.
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