Zhao Changpeng: The rescue will make the banks lose the power to manage risks. It is suggested that the regulators should only compensate the depositors

According to reports, Zhao Changpeng, CEO of Coin Security, tweeted that once the regulators implemented a rescue to the bank, it would fall into a dilemma. If there is no relief, it does not conform to the claim of “protecting consumers”. If the bank bails out, it will lose the power to manage risks, thus encouraging banks to take more and more risks, which will lead to more bailouts. He said that this was a thorny issue, and suggested that regulators should only help consumers and compensate them. Then shut down the bankrupt enterprises and recover part of the executive compensation.

Interpretation of this information:

In this statement, Zhao Changpeng evaluates the potential consequences of regulators bailing out a bank. He argues that if the regulators do rescue the bank, it would create a dilemma. On one hand, it would demonstrate that regulators are protecting customers. While on the other hand, it would enable banks to take risks without the fear of consequences. Consequently, this may lead to even more bailouts in the future. As a result, regulators must balance their desire to demonstrate responsibility towards consumers against the need to avoid creating systematic moral hazards. Changpeng suggests that regulators should provide compensation to customers and wind up insolvent organizations. Doing so will not only help customers but also reduce the number of future risks taken by banks.

The message highlights a key issue that governments worldwide face. The question of whether to bail out banks that are on the brink of insolvency is a significant one. Such bailouts are often deemed necessary to avoid triggering an economic crisis. However, the tremendous expense of such actions, along with the moral hazard they create, is a source of concern for policymakers. The argument made by Changpeng is that the authorities should only provide help to consumers and regulate banks’ practices better. Consequently, the regulators should only bail out the customers and not the bank itself.

In conclusion, the statement made by Zhao Changpeng underscores the need for policymakers to consider multiple factors when making bailout decisions. While the regulators must look after the interests of consumers, they should also take steps to maintain the efficacy of the financial system. The recommendations by Changpeng regarding compensation to consumers and winding up insolvent entities are simple yet practical steps that can help avoid future risks.