Europe is mak­ing a mis­take on fail­ing banks

Waterloo Region Record - - EDITORIALS & COMMENT -

The fol­low­ing editorial ap­pears on Bloomberg View:

Three years since their bank­ing union be­gan to take shape, Euro­pean Union reg­u­la­tors are seek­ing fresh pow­ers to deal with lenders in trou­ble. Their plan would let them stop with­drawals from a fail­ing bank for a few days while they ad­dress the prob­lem, with the aim of pre­vent­ing a run. But this ap­proach could eas­ily have the op­po­site ef­fect, spread­ing panic to the whole fi­nan­cial sys­tem. There’s a bet­ter way.

In­stead of freez­ing bank ac­counts, EU gov­ern­ments should en­able reg­u­la­tors to keep a bank go­ing while they re­struc­ture it and search for a new owner. This will re­quire EU gov­ern­ments to com­mit ad­di­tional re­sources for the task.

This ap­proach would mir­ror an ar­range­ment which is cur­rently in place in Ger­many, and it’s su­per­fi­cially ap­peal­ing: Clos­ing a bank would cer­tainly stop a run. But it could also have un­in­tended con­se­quences. De­pos­i­tors may run from a bank in trou­ble sooner.

Strength­en­ing Europe’s Sin­gle Res­o­lu­tion Fund is the bet­ter ap­proach. An ad­e­quately fi­nanced SRF would give reg­u­la­tors the chance to re­solve fail­ing banks with­out putting the fi­nan­cial sys­tem at greater risk.

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