bankersLast year, we asked if Europe’s banks were “too big to fail“. Well, since then we’ve had at least one meltdown in a national banking sector that threatened the stability of the eurozone, so perhaps it’s a good time to return to this question. We had a comment sent in from Otto wondering what can be done to avoid having taxpayers foot the bill when a big bank gets into trouble. When we spoke to Gunnar Hökmark, an MEP with the centre-right  Centre-Right, earlier this year, we asked him to to respond to Otto’s question.

Next up, Michael suggests that a solution could be found in passing legislation to separate what he calls the “casino” investment banks from retail banking. So, do we need a European Glass–Steagall Act? This was certainly the conclusion of a recent report adopted by the European Parliament’s economic committee. Would Hökmark agree?

Vote 2014

Voting is closed in our Debating Europe Vote 2014! The results are now in, so come and see what our readers thought!

IMAGE CREDITS: CC / Flickr – eyewash

29 comments Post a commentcomment

What do YOU think? What can be done to avoid having taxpayers pay the bill when a big bank gets into trouble? Do we need legislation to separate so-called "casino" investment banks from retail banks? Let us know your thoughts and comments in the form below, and we'll take them to policy-makers and experts for their reactions.

  1. avatar
    Katerina Kyriazi

    how about jail all the responsible bankers and let the bank go under? otherwise the point is utterly moot!

    • avatar
      marek voit

      You are not allowed to jail bankers. They give political contributions to lazy bums, mostly lawyers who in turn will have to jump how and when told to do so.
      After all it is FED who controls the money–not government. Obama doesn’t evne know how to count-I suspect
      Marek Voit

  2. avatar
    Rui Costa

    They are too big to fail and to big to jail – so they shouldn’t exist as they are today.
    We live in a bankocracy nowadays,

  3. avatar
    Nikolaos Sotirelis

    As even a kid knows, banks are private enterprises. If they have earnings they should be taxed, if they have losses they should be shut down. They have absolutely nothing to do with taxpayers.
    What on earth, do the bankers want? “the pie untouched, and the dog satiated”, as we saying in Greece?

  4. avatar
    Yo Lou

    Nothing is too big for financial canibals. they will destroy the world

  5. avatar
    eusebio manuel vestias pecurto

    Devia haver justiça a todos os Banqueiros responsáveis de deixarem os Bancos falir . Os Banqueiros devem ser mais transparentes com os seus clientes Hoje os mais poderosos da crise da Europa são os Banqeiros e os Politicos porque existe interesses dos dois lados Eu sou a favor de uma União Bancaria dentro da Europa e eu estou convencido que essa união irá trazer mais transparencia dentro dos Bancos e irá travar essa hipocrisia que ainda existe dentro de alguns Bancos da Europa

  6. avatar
    Tony Westfallen

    The Euro was/is the problem…it took away currency risk in countries which could not afford to be members, and seduced banks into taking larger than warranted exposures. Banks nor countries are too big to go bankrupt, and it should be allowed – with no penalty placed on (foreign) tax-payers.

  7. avatar
    Pedro Celestino

    The same that would take the profits are the same that should pay the bills. Then there (should be) is social welfare to make that they (every person on EU) will take a decent life no matter what.

    • avatar
      Paul X

      So you want the profits from the banks to pay for the bone idle to sit on their butt all day drinking wine and smoking Gauloise?

  8. avatar
    Hamza Serry-Senhaji

    To consider banks as any other enterprise is unwise. Banks are the blood flow of the economy mainly due to their role as intermediaries between savers and borrowers. They are key in financing the real economy and solving intertemporal liquidity problems. When banks fail and credit markets freeze you get Apple ,General electric or the nearby grocery store that can’t get liquidity for its daily activities. Bashing the banks and financial institutions won’t solve the problem.The key issue here is risk management, central banks supervision, their role as lender of last resort and international regulations (Basel III agreements). The dilemma here if not taxpayers who ? If depositors (institutional,individual,businesses) they’ll lose their savings and deposits. Shareholders ? They’ll already be hammered by the falling stock price. Bailouts are today the lesser of evils. Glass-Steagall isn’t a solution : Lehman Brothers was for 100% an investment bank, Northern Rock 100% retail bank both went bust. The financial industry has become global but supervision has not. Financial innovation has outpaced the regulatory framework making it even more difficult for public institutions to keep up. A banking and fiscal union in the eurozone is the first step in the right direction but it isn’t enough. Unless policymakers around the world do not reform and strenghten international institutions like the imf and start a new ‘Bretton Woods’ , these problems will keep coming back mainly due to economic imbalances and other idiosyncrasies of the global economy. In the 21st century, everything is interconnected. Defaults on subprime loans in California cause bankruptcies of Norwegian municipalities. A hard landing of the Chinese economy would without any doubt, at least indirectly, affect our European banks. Unless policymakers don’t fix the international system, our banks and economy will remain vulnerable whether we like it or not. Nostalgia of some glorious past without the euro and without globalization is a chimera and a denial of the prosperity achieved untill now.

    • avatar
      George Yiannitsiotis, PhD

      I could agree with your argument provided that you refer to banks and bankers; however, there are no banks opperating nowadays (with the exception of Grameen in Bangladesh and others that follow this pattern in-between savers and borrowers). On the contrary, there are usurers who take one euro from the savers and magically lend 50 to borrowers without examing their borrowing capacity. They do so in order to gain interest not from the existing one euro but also from imaginary 49 ones that do not exist in reality inflating thus the economy and depriving real values like work, products, commodities and invaluable public services (like healthcare, education, water and electricity networks etc)
      Well, I smart way for inetrantional usurers to get richer in fictitious economy but a guarantee of total catastrophy for real economies around the globe.-

      PS I let aside the fact that these international usurers gang wants private gains but “communicates” losses on the shoulders of tax-payers around the globe!

  9. avatar
    Nikolaos Sotirelis

    Dear Tony you are totally wrong. Countries aren’t banks. Aren’t enterprises. Countries should indeed, proceed to bankruptcy and refuse to pay their creditors in case that they are not able to do so.
    Creditors are privates who are supposed taking investment risks. Instead of that the EU leaders (???), saved those creditors and destroyed the countries, by transforming a simple debt to privates, to a mortgaged interstate debt with a shameless interest rate!!!
    In contrary, they rescued very easily, noiselessly and sneaky all the indebted Northern banks and insurance companies and they transfered the bill to the (foreign) taxpayers.

  10. avatar
    Nikolaos Sotirelis

    In addition, if a bank owe to be rescued for some reason, then it should be also socialised under the State control.

  11. avatar
    Tarquin Farquhar

    @Hamza Serry-Senhaji

    I would also add that Bank CEOs need to be qualified to at least M.Sc level in Quantitative Finance/Maths as too many CEOs/directors are just NOT bright enough/intellectually equipped to understand ‘high-finance’.

    I would also add that the concept of ‘joint and several liability’ is integrated into some of our business laws such that CEO/director greed/idiocy is punished with both a prison term AND a monetary fine.

  12. avatar

    I don’t like saying this, but I think we need more banks and bankers fighting over the investment bank pie. Or at least more competition. The aim would be to have less money concentrated in so few organisations! Currently if one of the major banks fails it would still take a brave govt to take such a large unemployment hit in one go (let alone the damage in the financial markets).

  13. avatar
    Chris Morrison

    Let me see if I have this right. If your net assets exceed your net liabilities you are worth something. If they do not, you are not. If the assets exceed the liabilites by a lot you are well off. If the liabilities exceed the assets by a lot you are really really poor.
    So what exactly exists to ‘save’? What are we trying to ‘rescue’? A debt sink hole??!! Surely the idiocy of trying to prop up what is no more than a debt pile is so obvious.

  14. avatar
    Laszlo Nagy

    Not only the investment banks suffered the crisis, but retail banks too. If we choose to live in a free market economy, then we should also accept the risks, including the fall of banks.
    The state and insurance companies should make sure, that when it happens, it won’t hurt the citizens much, but that is all. That “too big to fail” situation was, when all those big companies were about to fall at the same time.
    If it is ok to bail out banks, then why not help out other kinds of big companies, that have lots of workers (that is somewhat forbidden by EU rules)?

  15. avatar
    Paul X

    So if banks are getting too big then why not use this as an analogy for the EU?

    The more you amalgamate and integrate smaller banks(countries) into one large bank (State) the bigger the disaster when things go wrong

  16. avatar
    George Yiannitsiotis, PhD

    The price is not only austerity; democracy, human rights, poverty, destruction of real economy and productive chains are the more severe impacts of the rescue of international usurers gang (IMF/ECB/West European Usurers Corporation and the 4th Reich)

  17. avatar
    Diogo Miranda

    Banks create money and they hold everyone’s money. At the same time they effectively work in a self regulation environment – don’t be naive, Dodd Frank, EMIR, Basel, Central Banks and 99% of governments are effectively influenced/controlled by bankers.
    When they are big enough, they can create imbalances between what they have and what they owe big enough to bring down entire countries.
    But in the end of the line there are always physical persons taking all the wrong decisions.
    The only reasonable measure that can be taken and implemented by a responsible government is to sack the entire board of any bank that needs taxpayers’ rescue, and inhibit all of them from working in the industry for 10 years.
    Regardless of any additional criminal prosecution of anyone in specific cases, this blind and automatic rule is the only one that can act as an incentive for bankers to behave.

    Separating the Casino parts from the Banking parts would help too, but only if they stop working in self-regulation, otherwise any bank can find a way to make bets with the money from taxpayers/depositors.

    • avatar

      I agree, banks should not be allowed to create money. That is the point.
      If you have a transaction account, the money is yours and the bank should be able to give you the money back anytime, anywhere within EU at national cost. The banking system has to have a 100-percent reserve for on demand deposits. In this case the bank´s client doesn´t put the money in the bank for a term and an interest. He only asked the bank to keep the money safe. The bank´s client should pay for this service but the bank has to keep the money safe. This has to be clear for all.
      People need to have a place to put their money and have a system for electronic payments.
      We have to separate very clearly what are transactions accounts and what are investments (term deposits) with the associated risks.
      It would be better to have 2 different sort of institutions: Banks for Transactions accounts; Banks for investment applications.
      But in any case banks should not be allowed to create money.

  18. avatar
    Van Uffelen Catharina

    Banks have become too much part of countrys’ economies. good functioning means good control/supervision that is not too much linked to politicus/world economy as such. Like every company they need to deliver whilst taking their own responsability. Too easy to have some big brother/sister behind you to sort out THE wrongdoings.

  19. avatar

    What I see as a problem here is the absolute lack of moral hazard for the banks. Nowadays the banks are basically free in their actions and so they can implement risky policies such as unrealistically high interest rates (also one of the causes of the recent economical crisis). They can act like that mainly because they have basically the ensurance from the state that If anything happens they will be bailed out by the citizens. Under these circumstances, in my opinion the solution would be to restore the moral hazard for the banks. However, that would be probably slighly impossible because letting the banks fail ( and thus, restoring the moral hazard) in the eurozone would be deadly for the banking sector and generally the whole Euro project. Yet, imposing some kind of control over the banks would prevent them from implementing unrealistically high interest rates and other risky actions and thus, would lead to more stable environment. As far as Im concerned, stable banking sector is a vital aspect of a healthy and prosperous Eurozone.

  20. avatar

    We do need legislation to separate so-called “casino” investment banks from retail banks. That is exactly the point.
    If you have a transaction account, the money is yours and the bank should be able to give you the money back anytime, anywhere within EU at national cost. The banking system has to have a 100-percent reserve for on demand deposits. In this case the bank´s client doesn´t put the money in the bank for a term and an interest. He only asked the bank to keep the money safe. The bank´s client should pay for this service but the bank has to keep the money safe. This has to be clear for all.
    People need to have a place to put their money and have a system for electronic payments.
    There is no problem if the bank uses term deposits to lend money. In this case the bank is doing his intermediating function of matching the need for safe and readily available depositories for liquid funds with the need for reliable sources of credit for businesses, individuals and governments. This is adequate. But the depositor must be aware of the risk that they are taking. They must know the risk of this financial application. They must know that term deposits have a risk.
    We have to separate very clearly what are transactions accounts and what are investments (term deposits) with the associated risks.

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