Friday 9 December 2016

Small failures in banking don't bring the system down

ANALYSIS

Published 28/06/2011 | 05:00

FOR the second time in four months, Denmark has allowed a bank to go to the wall. There are clearly lessons to be learned here although they are not the lessons that many people will want to hear.

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The decision to allow the failure of a rural bank, which is not much more than a credit union on steroids, does not mean the Danish government would allow a large bank collapse.

The lessons from Fjordbank, Amagerbanken and the other seven banks which went to the wall is that it makes sense to have small lenders, which can be allowed to collapse. The potential losses for bondholders and senior management mean that there are real incentives to run banks properly.

Ireland, a country not much smaller than Denmark, has too few banks, which means that all our banks can claim with some justification that they are too big, or "systemically important" to be allowed to fail.

The State looks set to own almost every Irish lender listed on the stock exchange but when it eventually disengages from our banking sector, it should look closely at the Danish system of small, regional banks alongside a few pillar banks.

It should also change the law to place depositors above bondholders. Only then will we be free from the financial blackmail that has forced taxpayers here to pump billions into the banks.

Irish Independent

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