Six years after the global financial crisis, regulators are still grappling with the problem of banks that are too big to be allowed to fail, a top German central banker said yesterday.
Key reforms put in place post-crisis mean that it is less likely banks will fail in the first place, said Dr Andreas Dombret, a member of the executive board of the Deutsche Bundesbank.
But financial institutions must be able to exit the market without causing major economic damage, he said in an interview with The Straits Times.
An important part of this involves banks coming up with bankruptcy plans - or "living wills" - to prepare for an orderly failure, added Dr Dombret, who was here yesterday to meet representatives of the Monetary Authority of Singapore and other government officials.
The bankruptcy of United States investment bank Lehman Brothers was a key factor in the financial meltdown that led to the global financial crisis in 2008.
The creation of "living wills" requires banks to plan for a bankruptcy process that would not call for the billions of dollars in taxpayers' money doled out during the crisis to rescue systemically important financial institutions.
"Living wills" also help banks work through potential structural weaknesses "step by step", said Dr Dombret.
"If the bank is too big to fail, and things go well, the bank is profiting.
"But if things go wrong, the taxpayer pays. That is not a recommended equation."
Beyond banks, some economic watchers have also criticised a different institution - the euro - as "too big to fail".
Critics say the euro zone's economies are too different to adhere to a "one size fits all" approach, especially in the face of mounting sovereign debt across its 18 member states.
In response, Dr Dombret said euro zone governments have a clear commitment to preserving the currency.
"The euro is here to stay," he said, adding that the European Union is taking steps towards deeper integration as it implements a banking union.
This "immense political will" to preserve the euro area has translated into a number of structural reforms since the crisis, said Dr Dombret.
Europe's latest growth figures point to a "rainy summer" - the euro area as a whole did not experience any growth in the April to June period.
Still, "if policymakers take the right steps now, they can make the recovery in the euro area last and put it on more solid footing", said Dr Dombret.
This article was first published on Sep 27, 2014.
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