It’s no big surprise that former Federal Deposit Insurance Corporation chairwoman Sheila Bair thinks European nations ought to adopt a model like the FDIC to deal with the continent’s failing banks. What’s worth noting in Bair’s Fortune column on this topic is her assessment of the problems associated with taxpayer bailouts.
As we saw in the last financial meltdown, generous taxpayer support of ailing financial institutions may help contain immediate risks to financial stability. But the price of such bailouts is steep: a further weakening of market discipline, paving the way to yet another costly episode of reckless risk taking.
Hence, government bailouts are not just morally wrong. They also entail long-term costs that may exceed any short-term gains. That is why a good resolution system should be hardwired against bailing out creditors.