Who bears the risk of bank failure?
174. We have concluded that banks must be allowed to fail, and that such failures must be managed in an orderly manner. For the sake of clarity and transparency, it is important that all stakeholders in banks should be aware how the risk of bank failure is distributed. In general, in non-financial companies, shareholders and creditors take on the risk of company failure, but the situation with regard to banks is more complex. If, as happened with Northern Rock, the Government steps in to prevent the collapse of a bank, it takes on a significant risk on behalf of taxpayers. Depositors are treated as unsecured creditors under the existing arrangements, so clearly bear the risk that they could lose the rights to their deposits. 175. In a valuable written submission, Dr Paul Hamalainen of Loughborough University argued that the risks and costs of bank failure should be clearly placed on large depositors, junior bondholders, and shareholders, rather than small depositors or the Government.
