Banks need bonds as a buffer, says Tucker

Hugo Duncan
28 May 2009

Bank of England deputy governor Paul Tucker today said banks should hold assets such as government bonds to act as a buffer after the financial crisis exposed a "shocking" lack of liquidity at UK lenders.

"Regulators should define the liquidity buffer to comprise high-quality securities that can reliably be traded or exchanged in liquid markets, including in stressed circumstances," he said.

"In practice, that would mean focusing on government bonds in many economies."

Downing Street has spent billions of pounds saving the UK financial system from collapse.

"It has been shocking over the past year or so to discover how many medium-sized banks and building societies did not hold government bonds or other very high-quality assets," Tucker told the Bank of Japan's 2009 International Conference.

"Turning up in the core secured funding markets for the first time for years is an absolute giveaway of distress. All that has to change."

He said the liquidity squeeze created a "vicious spiral" where the credit famine fed the recession and in turn further damaged the quality of banks' loan books.