When Banks Need Capital, Synthetic Isn’t Good Enough: Editorial

The world’s banks are facing a big challenge: If more indebted companies follow auto dealer Tricolor Holdings and parts supplier First Brands Group into bankruptcy, lenders will need to be strong enough to survive the losses without damaging the broader economy.

It’s encouraging, then, that the European Central Bank is moving to curb a practice that has been eroding banks’ loss-absorbing capital. Other regulators should take note.

Contrary to how it’s often portrayed, capital is not an emergency reserve that banks can’t lend. It’s equity funding from shareholders, who agree to be first in line to take losses in return for ...