BoE's Tucker warns crisis has further to run

Bank's deputy governor cautions on rush to regulate
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The deputy governor of the Bank of England warned yesterday that the financial crisis could wreak further damage and that there were dangers in rushing to overhaul regulation.

Paul Tucker, who oversees financial stability at the Bank, said: "This crisis isn't yet over; we are still working our way through it. We don't know yet the ... costs of this crisis for our people or how business models are going to withstand [it]."

He told a Financial Services Authority conference on the Turner regulatory review that it was not yet clear how much financial activity needed to be constrained to maintain stability.

"There is a risk that we have run ahead of ourselves in deciding how we got here and what we should do about it," Mr Tucker added.

He welcomed the report by Lord Turner, the FSA's chairman, which called for banks to hold bigger reserves against future losses and for better monitoring of links between the financial system and the economy.

But he said controls on capital and liquidity to "tame the credit cycle" would not be enough to prevent future crises and that rules alone would not "take away the punchbowl as the party gets going".

"A macroprudential approach to stability has to do rather more than bring together a central bank's macroeconomists and a micro regulator's line supervisors," Mr Tucker told the conference.

The bosses of HSBC and Standard Chartered also warned of risks in regulators' tougher line on bank capital. Lord Turner and other regulators want banks to build up capital reserves in good times so they have enough to absorb losses when the economy sours and bad debts rise.

Stephen Green, HSBC's chairman, said there was a danger that countries would set their capital buffers to be a bit better than average, leading to "mercantilism in the banking system" and a general shortage of bank lending available to support the world economy.

Peter Sands, Standard Chartered's chief executive, warned that there could be a capital "ratchet" so that instead of a big buffer being allowed to reduce as it absorbs losses, there will be a never-ending demand for more capital, limiting banks' ability to lend.

Lord Turner said Britain's banks already had capital ratios above what was needed. "We don't want to increase capital ratios in the immediate future, instead the ratios should be falling as capital buffers are used to absorb losses and maintain lending to the economy," he said.

Lord Turner called on next week's G20 meeting of world leaders to agree on the basics of regulatory reform so that a plan could be put in place quickly. The G20 also had to agree that even its most powerful members, particularly the US, must accept criticism of their financial systems.

Alistair Darling, the Chancellor, told the conference that the Government would be "vigilant" to maintain competition in the bank sector. The Government waived competition rules to let Lloyds buy HBOS, creating a UK superbank.