March 25 (Reuters) – Moral hazard may not be quite dead in
Europe but it has a bad, hacking cough.
A new, tougher policy on banking bailouts, made flesh in
Cyprus and enunciated by Dutch Finance Minister Jeroen
Dijsselbloem, will shrink Europe’s arguably overly-large banking
system and, ultimately, may put unbearable pressure on the
Actually the policy, allowing holders of bonds and uninsured
depositors in insolvent banks to actually lose money, is not so
much new as a return to following the rules of capital
structure, with equities taking the first loss and uninsured
deposits the last to suffer.
It does mark a huge change from how Europe, and the U.S.,
have handled bad banks since the crisis began, sheltering
creditors and depositors from the consequences of their
risk-taking in ways that make them likely to take on more and
sillier risks, a syndrome called moral hazard.
“If there is a risk in a bank, our first question should be
‘Okay, what are you in the bank going to do about that? What can
you do to recapitalise yourself?’,” Dijsselbloem, who also heads
the Eurogroup of euro zone finance ministers, told Reuters and
the Financial Times.