However, it is essential that banks’ profitability cannot any longer be based on their own funding being supported by public safety nets, which enables high leverage and, through that channel, a seeming improvement in profitability. Owners and investors need to be prepared for bearing the risks: both profits and losses.
The new bank recovery and resolution legislation offers tools for a genuine transfer of risks to bank owners and investors in bank debt markets. This may lead to bank owners and investors requiring higher risk premia in the future. There is, however, no return to times of ineffective regulation and the practice of taxpayers ultimately bearing the risks involved.