Can a major bank really be allowed to fail?

Dealing with bank failures requires a delicate balance between managing expectations and finding a credible solution

The events in Cyprus during the past few weeks have put in the spotlight what, in a European context, has almost been a taboo: can a major bank be allowed to fail? Looking back at recent financial history, it is difficult to find examples of fully-fledged bank failures where creditors have been forced to take losses. Bank rescues have led to the “too big and too interconnected to fail” proposition. This subverts the incentives for bank owners and, not least, for creditors, since the infrequency of lenders being faced with losses has entrenched moral hazard in the system.

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