Bloomberg News

Bini Smaghi Says PSI May Please Voters, End Up Costing More

October 25, 2011

Oct. 25 (Bloomberg) -- European Central Bank Executive Board member Lorenzo Bini Smaghi said that while forcing banks to help pay for a bailout may please voters, it “ends up costing the tax payer much more.”

“Experience has shown that penalizing banks, and even letting them fail, is not necessarily the best way to make the financial markets work better and assess risk appropriately,” Bini Smaghi said, according to the text of a speech delivered in Frankfurt on Oct. 17 and published by the ECB today.

“The first thing that financial institutions do when they realize losses due to their underpricing of risk is to immediately overprice risk and to deleverage, which tends to fuel a spiral with negative effects on the real economy,” Bini Smaghi said according to the speech text.

To contact the editor responsible for this story: Gabi Thesing at gthesing@bloomberg.net


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