The world’s top bankers are gathered at Euro Finance Week in Frankfurt this week where they have been hearing tough talk about letting financial institutions fail.
The event is organised by the European Central Bank and ECB policymaker Axel Weber said banks must be allowed to fold to avoid them getting complacent.
The Bundesbank president also said stricter rules are needed as stability is essential for long term economic growth: “We need a more stable finance system. Of course, the necessary changes to get that are challenging and these challenges in some cases will be painful. However, they are necessary and there is no alternative.”
Weber backs the idea of banks having to issue special bonds which would automatically convert to shares in the event of a crisis so government rescue are not needed.
In the past the ‘too big to fail’ policy led to many bailouts.
Josef Ackermann, the head of Germany’s largest lender, Deutsche Bank does not think that is fair.
He said: “How could banks that fail be taken out of business without destabilising the entire system? It cannot be right that banks that fail, are rescued, and then casually and happily become a competitor again after being bailed out by the taxpayer.”
However the bankers remain divided on how to regulate major financial institutions, especially when they run into trouble, and some have warned against over-regulation.