Banks must reclaim their rightful place in a market economy and be subject to progressive regulations that keep up with changes in the industry, Bank of England Deputy Governor Paul Tucker wrote in the Financial Times on Tuesday.
Tucker wrote in an op-ed piece that banking should not depend on a safety net from taxpayers and that a much broader view of the financial system was needed to instil market confidence.
Regulators have to recognise that the rules of the game failed to keep up with the progressive fusion of banking, capital markets and insurance; and were not modified in response to accumulating macroeconomic imbalances, he wrote.
He called on the G20's financial reform programme to go beyond traditional policy options and put in place a credible regime for managing failing financial institutions, which would solve the too big to fail problem.
A credible resolution regime will ensure that debt holders, as well as equity holders, are exposed to loss. Creditors will have a powerful incentive to monitor the risks banks run, increasing market discipline, he wrote.
The second priority for reform is to ensure that regulatory regimes recognise the inter-connectedness of capital markets and their interaction with the macro-economy, according to Tucker.
(Reporting by Stephen Mangan; editing by Carol Bishopric)