Before 2008, banks took excessive risks and some ended up being bailed out by the taxpayer.
Their profits were privatised but, because they were too big to fail, their losses were nationalised. This moral hazard, where banks can presume they will be bailed out if they fail, was one of the reasons that there was so much public anger. To stop the banks from ever being bailed out by the taxpayer again, the banks must be allowed to fail. Getting rid of that moral hazard is a cornerstone of fixing “too big to fail”.
But now we are at risk of institutionalising a new moral hazard. EU finance ministers are meeting on Tuesday to discuss a proposal for a pre-funded “resolution fund” that runs the risk of undermining the objectives of the directive. The purpose of the fund is poorly defined but it runs the risk of replacing taxpayer bail-out with competitor-funded bail-out. In doing so, it reintroduces moral hazard.
The fund is likely to require banks to put aside €70bn (£59.4bn) to €100bn. The UK will pay for around 15pc of this – anywhere between €9bn and €14bn. Even if this is funded over a long period of time, the result is that it is pulling yet more money out of the economy when it is needed to support economic growth. The money has to come from somewhere and, inevitably, forcing the industry to put billions of pounds away into this fund will mean there is less money available for SMEs and householders to borrow. The Prime Minister’s adviser on enterprise and SMEs, Lord Young, on Monday reported that if £10bn of the cash that businesses are sitting on was injected into our economy, the UK would see business investment return to pre-crisis levels. Yet this fund would cost the UK just that.
http://www.telegraph.co.uk/finance/comment/10055069/Banks-must-be-allowed-to-fail.html
Their profits were privatised but, because they were too big to fail, their losses were nationalised. This moral hazard, where banks can presume they will be bailed out if they fail, was one of the reasons that there was so much public anger. To stop the banks from ever being bailed out by the taxpayer again, the banks must be allowed to fail. Getting rid of that moral hazard is a cornerstone of fixing “too big to fail”.
But now we are at risk of institutionalising a new moral hazard. EU finance ministers are meeting on Tuesday to discuss a proposal for a pre-funded “resolution fund” that runs the risk of undermining the objectives of the directive. The purpose of the fund is poorly defined but it runs the risk of replacing taxpayer bail-out with competitor-funded bail-out. In doing so, it reintroduces moral hazard.
The fund is likely to require banks to put aside €70bn (£59.4bn) to €100bn. The UK will pay for around 15pc of this – anywhere between €9bn and €14bn. Even if this is funded over a long period of time, the result is that it is pulling yet more money out of the economy when it is needed to support economic growth. The money has to come from somewhere and, inevitably, forcing the industry to put billions of pounds away into this fund will mean there is less money available for SMEs and householders to borrow. The Prime Minister’s adviser on enterprise and SMEs, Lord Young, on Monday reported that if £10bn of the cash that businesses are sitting on was injected into our economy, the UK would see business investment return to pre-crisis levels. Yet this fund would cost the UK just that.
http://www.telegraph.co.uk/finance/comment/10055069/Banks-must-be-allowed-to-fail.html
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