16 July 2012

Gillian Tett: America’s lessons in killing off toxic banks

As European regulators and policy-makers thrash out their ideas about how to rebuild confidence, they might do well to take a look at how "union" has worked in America, and how this has helped quell the 2008 US banking shock, writes Tett in her FT column.

Part of this story revolves around the so-called Troubled Asset Relief Programme (TARP) that the US government implemented in 2008; this provided badly needed recapitalisation and transparency for the banks. However, the other, less-discussed element is the FDIC [Federal Deposit Insurance Corporation], and the Friday night “death drill”. For this has also stabilised the system, and as such offers lessons for eurozone politicians and regulators...

Now it will not be easy to transplant all these lessons to Europe. The FDIC, after all, has mostly “only” dealt with domestic banks, not cross-border banking behemoths, and the legal code in Europe is radically different. Most crucially, Germans politicians appear unconvinced that a mutual insurance scheme is a good idea at all.

However, leaving aside these legal and political niceties, the most important lesson is that having a simple message and purpose is crucial for building trust. The FDIC “works” because it does what it says: kills ailing banks, while protecting depositors. If the eurozone could build similar clarity, with whatever regulatory structure it chooses, it might start building a better financial world. Or, put another way, if the eurozone could kill 450-odd Spanish, Greek or French banks without a consumer or market panic, the euro might have a more viable future. Politicians take note.

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