Paul Tucker risks row with Chancellor over bank rescue plans Resolving "depositor preference" is critical to the regulatory reform agenda because, in future, bank creditors will be forced to take losses to protect taxpayers from bailing out them out. Deposits rank alongside senior creditors and so are equally liable for losses. The insurance scheme protects the first £85,000 of savings but the rest is at risk. Preference on uninsured deposits would not exempt them from losses but would make it less likely as other bondholders would have to be wiped out first. The UK Government has pledged to adopt the Vickers recommendations which stated that only "insured" deposits should be protected, and legislation has been drafted to include the reform. There are no plans to go further currently. Mr Osborne has warned that bondholders could simply switch to deposits, making the banks less easy to resolve in the event of another crisis. Changing the hierarchy through preference could also make it more expensive for banks to operate. The Chancellor said last week: "You don't want to have to bail-in uninsured depositors, we have to be careful we do not create perverse incentives." Citing the example of Cyprus, he added: "Quite a lot of the depositors were Russian shell companies. Do we really want to protect them over the Cypriot pension funds that have gone and bought bank debt? The Cyprus bail-out, under which insured depositors were originally at risk, has focused minds in Europe. Uninsured depositors ultimately were made to accept losses of more than 60pc on their savings above €100,000. Mr Tucker recognised the risk, which is why he only advocated moving part way to the European plans. "If [uninsured deposits] were to be preferred, it would be likely that a chunk of bonded finance would over time morph into borrowing-instruments that had the legal form of "deposits." That would increase the cost of any residual bond issuance," he said. Europe appears to be moving towards full depositor preference, with German Finance Minister Wolfgang Schaeuble and Dutch Finance Minister Jeroen Dijsselbloem signalling that they would back the plan, alongside France and Spain. Mr Tucker, who was the favourite to succeed Sir Mervyn King as Governor but lost out to Mark Carney, was speaking on the wider issue of bank resolution to end the current "semi-socialised" system of taxpayer rescues. "Unless we can handle the failure of banks and other financial firms in an orderly way, it is hard for governments to tie themselves to the mast of eschewing the temptations of "bailout" using taxpayer's money," he said. The extent of progress since the 2008/09 bailouts, while still incomplete and needing continuous political impetus, is good.