View from City Road: Principles of bank rescues

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The Independent Online
Days after claims that pounds 7m of capital would have saved Equatorial, the Asian bank that was closed last week, the Bank of England has spelled out for the first time its six detailed criteria for carrying out bank rescues.

Brian Quinn, the director in charge of supervision at the Bank, said there was no 'too big to fail' doctrine, but a 'too important to fail' principle. This leaves the door open to rescues not only of the core banks but also of small institutions with a sensitive role such as that of Johnson Matthey Bankers in the bullion market.

This Bankspeak is deliberate. Mr Quinn said giving too much away about the Bank's thinking would be 'tantamount to showing the cat the way to the dairy'. Dodgy bank managements could rip off their customers with impunity if they knew their central bank would pick up the tab.

Mr Quinn rightly made clear that the Bank is not in the business of subsidising private shareholders. Where there have to be rescues they will be constructed so shareholders receive no benefit.

The Bank is prepared to put money into banks in difficulty, but not risk capital. The funds would be to ease a liquidity crisis and not to prevent insolvency. Mr Quinn said he saw 'nothing particularly disturbing' about a central bank having to make a bad-debt provision.

The Bank of England does not provide working capital, either. But where it does give help in the form of loans or guarantees there should be a clear plan for its eventual withdrawal. Sometimes that would amount to no more than an orderly rundown of the business.

The remaining criteria for rescues are those you would expect from a central banker: discretion, to prevent runs on banks, which would be inevitable if news of a rescue leaked prematurely; and a 'parsimonious' attitude, avoiding too many rescues. Repeated bail-outs 'lock in excess (banking) capacity and help to undermine the whole structure, making it more vulnerable to shocks,' he said. Quite so.