03 April 2012

FT editorial on Commissioner Michel Barnier's plans for wrapping up insolvent banks

Mr Barnier tackles the elephant that most EU policymakers keep trying to push to the corner of the room: that taxpayers cannot pay for bank losses too huge to be absorbed by banks' equity cushions.

Mr Barnier says what everybody knows: if losses are too big for shareholders to absorb, creditors must take a hit. His new paper presents sensible options for “bailing in” banks’ debt liabilities. The idea is to simulate normal corporate insolvencies in ways and at a speed suited to the fundamental role the banking system plays. Just as lenders to insolvent companies cannot expect to get all their money back, nor should lenders to banks. It shows how rotten things had become that it is beyond the wit of governments to follow this simple principle. Mr Barnier should keep fighting to restore it.

He plans for regulators to write down debt. But they will think twice, or more, before pulling the plug on powerful creditors. What is more, weak banks can bring on a credit crunch long before regulators deem them insolvent. So there is a need for automatic triggers based on market measures, as proposed by the Bank of England’s Andrew Haldane. Mr Barnier should also consider the US policy of depositors’ priority over other creditors.

While not perfect, these proposals are better than anything that has yet been tried in the eurozone. The insistence on treating even tiny banks as if they were Lehman Brothers has worsened the death spiral between banks and sovereigns. If Brussels had pushed through Mr Barnier’s current plan two years ago, the debt crisis might not have got so out of hand.

Full article "Listen to Brussels’ zombie slayers" (FT subscription required)

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