Banks should be 'allowed to fold'


European Central Bank policy maker Axel Weber said today that banks must be allowed to fold and backed the idea of issuing special bonds which would automatically convert to equity in the event of a crisis.

Speaking in Frankfurt at the opening of Euro Finance Week - which is expected to see bankers and policymakers clash over how far to go with new regulation - Mr Weber stressed the need for stricter rules, saying a stable banking system was vital for long term growth.

He also underscored a number of areas for improvements and said bail-in instruments, such as contingent convertible bonds which can convert to equity if a bank gets into trouble, were one option for large banks that play a key role in global finance.

"Even though there are a number of open questions these alternatives seem worth considering," Mr Weber said.
He also said banks need to be allowed to fold to avoid complacency and so-called 'moral hazard' developing among bankers.

"The relevant instrument in this context is a restructuring mechanism that allows for a wind-down of systemically-relevant banks without overburdening markets, Weber said."

The Bundesbank's president also dispelled the idea that banks would have to cut their lending to businesses in the real economy to meet new capital requirements.

"The argument that is being neglected is that banks have other means of meeting additional capital requirement beyond reducing lending," Mr Weber said.

Bank executives at the annual gathering are worried that yet more regulation on top of measures discussed at the G20 summit in Seoul, which ended a few days ago, will dent bank profits and, potentially, national economies.

Speakers during the week include European Central Bank president Jean-Claude Trichet, IMF chief Dominique Strauss-Kahn, French finance minister Christine Lagarde, European Commissioner for economic and monetary affairs Olli Rehn, German finance minister Wolfgang Schaeuble and Deutsche Bank chief executive Josef Ackermann.

On top of regulation issues and the progress Europe's banks are making in repairing their battered businesses, fears about the future of heavily indebted euro zone members such as Ireland, Portugal and Greece are likely to dominate both public and private conversations at the conference.