Banks must be allowed to fail in order for capitalism to succeed according to Paul Tucker, the deputy governor of The Bank of England (BoE).
Speaking on BBC-Two, Tucker also said that bank reforms must continue, beyond the changes already implemented upon the financial services sector since the 2008 global crisis.
Tucker maintains that banks still lack sufficient capital and that no bank should be categorized as too big to fail. The larger banks, he indicated should be pressured into holding enough capital (above currently-mandated international rules) to withstand heavy losses in the event of another crisis.
If we have a system where banks take the upside but the taxpayer takes the downside something has gone wrong with capitalism, with the very heart of capitalism, and we need to repair this, Tucker said.
After huge bailouts, the British government (i.e., the taxpayer) owns a stake of 83 percent in Royal Bank of Scotland (NYSE: RBS) and 41 percent of Lloyds Banking Group (NYSE: LYG).
Capitalism can't work unless these financial firms at the centre of the heart of capitalism can be subject to orderly failure. The rules of capitalism need to apply to them just as they do to non-financial companies, he also noted.
Insolvency laws, he added, should be introduced to enable banks to more easily go bankrupt without the taxpayer incurring any losses.
We want the upside to go to the shareholders and to some extent the managers, but the downside must go with that too. This is going to require big changes internationally, Tucker said.