jon nicolaisen : should banks be bailed out? speech by mr jon nicolaisen, deputy governor of norges bank ( central bank of norway ), at the norwegian academy of science and letters, oslo, 14 april 2015. * * * please note that the text below may differ slightly from the actual presentation. on sunday, 29 september 2008, two weeks after the bankruptcy of the us investment bank lehman brothers, the irish government faced a dilemma : on the following morning, monday, 30 september, the debt of a number of irish banks was falling due, and many of these banks could not meet their obligations. unable to issue new debt in the market, they were in danger of failing. if the banks were to close, economic activity in ireland would be crippled. the authorities had to act. it was not a matter of a trifling amount. at the time, the debt of irish - owned banks was over two times ireland ’ s gdp. 1 over half of the banks ’ debt had been funded in the market. that evening, the irish government decided to guarantee most of the debt of irish - owned banks for two years. the government and the irish people thereby assumed a considerable risk. eventually, the losses at irish banks also proved to be enormous. since then, the irish authorities have made capital injections into banks equivalent to around 40 percent of gdp to keep the banks running. 2 this is money the irish government has had to borrow. along with the downturn that followed in the wake of the financial crisis, the irish bank bailout quadrupled ireland ’ s sovereign debt. 3 the interest on the debt is borne by all, rich and poor alike, regardless of who had benefited from the pre - crisis economic boom. the banking crisis and the government debt led to a deep economic downturn in ireland. it is only now that ireland has returned to its pre - crisis level of prosperity. but the economic and social consequences would probably have been even more serious if the banks had not been kept afloat. the irish bank bailout illustrates a number of classic questions : was it right for the government to risk its citizens ’ money to rescue the banks? did the irish authorities actually have a choice? when things went wrong, was it right to protect creditors as the irish authorities ultimately did? how has this affected the future risk taking of the banks ’ owners and creditors? the answer to the question of whether banks should be rescued is about economics and incentives. but the problems banks

ensure that this happens. norwegian legislation must be updated in line with the new directive. this will improve the pricing of risk in the banking system. we will not bail out the shareholders. ultimately, bank owners and management must ensure that banks are run prudently. it is crucial that they are aware of their responsibilities. we cannot regulate banks to death. i am confident that owners and managers of norwegian banks will act responsibly. at the same time, banks must be regulated. capital requirements must be high and we must ensure that banks are solid and well - run. this will reduce the risk of a systemic crisis. this will also give banks ’ owners a stronger motive to take account of long - term risk. banks themselves and finanstilsynet ( financial supervisory authority of norway ) have done a good job to ensure a solid norwegian banking sector, so that the authorities avoid having to bail out banks. bis central bankers ’ speeches