Before 2008, banks took excessive risks and some ended up being bailed out by the taxpayer.
by Anthony Browne, The Telegraph:
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.
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