LONDON May 13 Britain's banks should start adjusting their balance sheets to a world where they are no longer "too big to fail", Bank of England Deputy Governor Jon Cunliffe said on Tuesday.
Speaking to an event held by Barclays bank, Cunliffe cautioned lenders that once new rules aimed at shielding taxpayers from bank failures are in place, markets won't return to levels seen in the run up to the 2007-09 financial crisis.
"Liquidity premia were likely too low and liquidity risk very probably under-priced before the crisis," Cunliffe said.
"Market participants will need to recognise this change in market structure and adjust their balance sheets accordingly," Cunliffe added.
One of the rules being finalised to end banks being "too big to fail" is a requirement to hold a buffer of bonds that can be used to shore up a failing bank once it has burned through all its regulatory capital.
Cunliffe said the aim won't be to resurrect every failed business but only to keep the bank's critical operations going to avoid harming financial stability.
The BoE's Financial Policy Committee will open a public consultation on a possible new power to vary a bank's leverage ratio or cap on balance sheets, Cunliffe said. (Reporting by Huw Jones, editing by Jemima Kelly)