Eurozone Banks need to learn their lessons

Daniele Nouy, in charge of the Eurozone’s new bank overseer, the Single Supervisory Mechanism (SSM), suggested on Monday that some banks with weak capital “have no future and should be allowed to die”. The SSM is getting ready to conduct an asset quality review of the 130 banks that hold about 80 per cent of all bank assets in the 18-member currency bloc. While the long term effects of allowing weak banks to close are hard to foresee, the considerably tougher language regarding the handling of Europe’s banks is a positive sign.

Undercapitalised banks have plagued the Eurozone for far too long and sovereign intervention to save the banks is only treating the symptoms and doing nothing to cure the disease. The bad debts that these banks hold should not, again, be passed on to the taxpayers. While there may be some short-term unpleasantness, especially in countries such as Germany and France who, to a large extent, have supported these banks, it will also remove the burden of support from Eurozone governments who can now focus their attention on economic recovery.

It will also drive home a lesson that banks need to learn: Be careful with your money. There are no risk-free investments.