Monetary Policy

It’s important to let banks fail well

Mark Littlewood writes in The Times

IEA Director General Mark Littlewood has written in The Times outlining why regulators should stop trying to make the financial system failproof and instead ensure that banks are allowed to fail safely.

Mark wrote:

“Rather than continually falling for the Titanic fallacy, whereby banks will be constructed supposedly to be unsinkable, we’d be better advised to make sure the lifeboats work for whenever an emergency occurs. Similarly, we need to spread risk by giving ordinary depositors skin in the game. The state could provide a facility for those who wish their savings to be fully guaranteed, but this would come with a mix of fairly high banking fees and negative interest rates. If you want to chase higher rates of return by investing in equities, buying into cryptocurrency or analysing the form book in horse racing, you should not expect the taxpayer to cover any losses. Putting your money into a private bank would not be as risky as gambling your life savings in Las Vegas, but neither should it be risk-free.

“Even if we avoid a repeat of the banking crisis in the coming months, the longer-term picture looks perilous as we appear unwilling to normalise either failure or risk. That means that when the next crash comes, it probably will be just as grisly as the last one.”

Read Mark’s full piece here.