The challenge in 2008 with the Lehman collapse and AIG's later struggles is that there was no method to wind down non-bank financial institutions except through

The challenge in 2008 with the Lehman collapse and AIG's later struggles is that there was no method to wind down non-bank financial institutions except through the bankruptcy courts. After the financial crisis regulators were given authority to take over non-bank financial institutions and also created the concept of bail-in where a large bank or financial institution that was in financial trouble could raise equity over night through forced conversion of some of its bonds to equity. This would of course dilute existing shareholders and result in potential losses for bond holders but the bank continues to function which removes the systematic risk. As part of the reform the banks were also required to hold more liquid capital to reduce the risk of runs and to go through stress tests to validate that bail-in capital was adequate. The politics are that in Italy the banks bonds that would be subject to bail-in are held mostly be retail investors (granny and grandpa) and a bail in would be politically costly and they want to bailout banks using tax-payer funds. At the end of the day losses due to bad loans have to be allocated. Those losses can be allocated to bank equity and bond holders through bail-in; depositors through bail-in or lower interest rates; tax holders through bail-outs; or to savers through Central Bank inflation and fiscal stimulus. Each one of those scenarios creates winners and losers with vested interests. There is also strong cultural memory with Germany looking back to the hyperinflation of the 30's that gave rise to the Nazi Party and the US looking back to the 30's and the Great Depression when losses were allocated to banks and depositors. The alternative is extend and pretend which is to ignore bad debt and because in the future "we're all dead." This was used in Japan after its financial crisis and creates and interlocking group of zombie companies and banks which seem to feed on the rising generation. Pick your poison I guess.