Sir Paul Tucker, Former Deputy Governor of the Bank of England and Chair of the Systemic Risk Council, recently spoke with Börsen-Zeitung on the state of the global financial system and financial stability policy.
The risk of a global financial crisis over the next three to five years is “certainly not negligible,” according to Tucker. He notes that this is so not only because there are still major weaknesses in the global economy, such as the fault lines in the institutional foundations of the euro area or credit growth in China, but also because the global economy could simply fall victim to bad luck.
He emphasizes, however, that in comparison to 2007, there are generally much more and better regulatory mechanisms in place to counter the threat of a repeat of the Great Recession. To the extent that debt has increased, hey says, more of it is now in the public accounts and if the economy were hit by a shock, generally governments have more scope than the private sector to extend maturities and so smooth spending.
Tucker points to a potential disintegration or further diminution of the European Union as posing the greatest risk to global economic prosperity currently, and suggests that several euro-area economies need more flexible markets to offset their limited control of monetary policy to make adjustments.
Concerning the low interest rate environment of the last several years, and the role of Central banks therein, Tucker says “persistently expansionary monetary policy carries risks, without question.” He explains, however, that does not mean that, to avoid debt rising or exuberance in the financial system, central banks can simply forget their inflation target and allow inflation miss the target. “What central bankers can and, perhaps, should do more often is to press for regulation. In the current environment, banks should have more capital.”
Read the full article here: Börsen-Zeitung Interview with Sir Paul Tucker