Clearing houses are the biggest risk, says Tucker

The clearing houses which act as the processing centres for trillions of dollars of global trading could pose the biggest risk to the world’s financial system in a future crisis, according to the outgoing Deputy Governor of the Bank of England.

Paul Tucker, the Bank of England's deputy governor, appearing before a parliamentary committee - Helping with inquiries
Paul Tucker, Deputy Governor of the Bank of England, has warned about the risks posed to the financial system by central clearers Credit: Photo: REUTERS

Paul Tucker, who is the most senior Bank of England official responsible for financial stability, said so-called central counterparty clearers could be at the heart of a new crash if they were not regulated properly.

Giving evidence to MPs on the Treasury Select Committee, Mr Tucker warned that world leaders had made clearers “too important to fail” and said he was concerned at the lack of oversight of their operations by regulators.

“The banks became too big to fail by accident, central counterparties have almost been mandated by the G20 leaders to be too important to fail. We need to make sure these institutions are sound and well regulated and could recover in distress,” said Mr Tucker.

Clearers act as intermediaries between buyers and sellers of traded financial assets, such as shares, bonds and increasingly complex derivatives.

Most clearers are owned by private companies. For instance, the London Clearing House, which processes much of the UK-based trading, is majority owned by the London Stock Exchange.

However, Mr Tucker warned that having “for-profit” companies running clearers could be storing up problems for the future.

“I worry that they are either for-profit institutions, or embedded in for-profit institutions. If ever a CCP does fail anywhere in the world, people will say, I can almost hear the response immediately: “what on earth were we doing allowing them to be for-profit institutions.”

“I don’t subscribe to the view that banks are purely utilities, but central-counterparties are purely utilities,” he said.

Mr Tucker said he thought CCPs should be subject to similar stress tests to those that have been imposed on banks since the financial crisis as well as being forced to hold more capital against potential losses.

Until the announcement of the appointment of Canadian central bank governor Mark Carney to replace Lord King as Governor of the Bank of England, Mr Tucker had been seen as the most likely successor. Mr Tucker announced his departure from the Bank in June and is expected to move to the US to work in academia.