Calling the Big Banks’ Bluff

BERLIN – The G-20’s decision in November 2008 not to let any systemically relevant bank perish may have seemed wise at the time, given the threat of a global financial meltdown. But that decision, and bad policies by central banks and governments since then, has given over-indebted major banks the power to blackmail their rescuers – a power that they have used to create a financial system in which they are effectively exempt from liability.

Big banks’ ability to extort such an arrangement stems from an implicit threat: the financial sector – and with it the economy’s payment system – would collapse if a systemically important bank were ever pushed into insolvency. But it is time to call the bankers’ bluff: maintaining the payment system can and should be separated from the problem of bank insolvency.

Above all, the G-20’s decision to prop up systemically relevant banks must be revisited. And governments must respond to the banks’ threats by declaring their willingness to let insolvent banks be judged accordingly. A market economy must rest on the economic principle of profit and loss. An economy with neither bankruptcies nor a rule of law that applies equally to all is no market economy. The law that is valid for all other companies should apply to banks as well.