Banking resolution and moral hazard

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The challenge that banking regulation is now facing is to ensure a healthy and prudent bank management defining a set of neutral controls leaving to banks the assessment of the business models most suitable to the achievement of their entrepreneurial goals and at the same time to make investors only, instead of tax payers, bear the consequences of management mistakes and misconduct. That is easier said than done. The recent Italian developments, as the consequence of the resolution of four minor banks and, above all, Italian and EU politician reaction to claims made by junior investors on subordinated debt turned sour, highlight the fact that a regulation based on ex post interventions only after the issues have come afloat is not acceptable.

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