WirtschaftsWoche Exclusive

Footing the Bill for Failure

  • Why it matters

    Why it matters

    The question of who should foot the bill of failed banks is highly controversial, with the E.U. tending towards protecting taxpayers and letting investors pick up the tab.

  • Facts

    Facts

    • The Single Resolution Mechanism, created in 2014, plans for and executes the closure of failing banks across the euro zone to limit economic fallout.
    • Elke König, the former head of Germany’s financial regulator, has headed the agency since 2014.
    • She believes state bailouts have a place, but that investors must accept responsibility for risky gambles on creaky banks.
  • Audio

    Audio

  • Pdf
Bafin-Chefin Elke König
Elke König is not against bailing out failing banks. Source: DPA

Elke König has been in charge of the Single Resolution Mechanism in Brussels since the end of 2014. A key pillar Europe’s banking union – an effort by the continent to pool its resources and supervisory functions in the aftermath of the 2010-2012 debt crisis – her agency plans for and executes the closure of failing banks that have business across the euro zone. The goal is to close them with limited economic fallout. Ms. König was previously head of Germany’s financial regulator, the Federal Financial Supervisory Authority (BaFin).

Her job could be about to get much harder. Several Italian banks are currently teetering on the brink, a problem made worse by the country’s decision to vote against constitutional reforms last Sunday, prompting the resignation of Prime Minister Matteo Renzi. So far, the country’s government has been trying to avoid bank liquidations because an unusually large number of bank bonds are held by private individuals in Italy. It is considering a state bailout that would be backed by Europe’s own bailout fund, the European Stability Mechanism.

Despite her role, the 62-year-old Ms. König is not ruling out the use of state funding to solve the country’s banking problems. If investors have been misled, then some may be entitled to compensation, she told WirtschaftsWoche, a sister publication of Handelsblatt.

But Ms. König’s complaint is that private investors have obviously underestimated the risk inherent in bank bonds, and should shoulder some responsibility. Such a view is likely to put her at odds with private investors.

While her job may be to expect the worse, Ms. König is actually optimistic about the state of Europe’s banks: “Horror scenarios are nonsense,” she told WirtschaftsWoche.

Ms. König expands on her thinking on bailouts, bad debt and low interest rates in the full interview below.

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