Germany Says No Bailouts for Deutsche Bank or Any Other Struggling Lenders
fortune.com
fortune.com
In at least the US and Denmark we have the concept of systemically important banks. Bank that are to big to fail. These banks will, currently always be bailed out by the tax payers. So far it seems to have worked out for the benefit of the tax payers, because the governments have managed to make money on bailing out these banks.
What I however don't understand is why governments allow "to big to fail" banks to exist. The Danish government have actively encouraged people to choose bigger banks, arguing that there are to many banks in the country. It seems like what they should do is break up banks that are large enough to harm the nations economy, should they fail.
Given the ECB is more or less committed to sub-zero interest rates for the next decade, the German government bond auction very recently failed, DB's and the German financial industries' reluctance to accept what started in 2007 has ended right at their door because of their inaction, and 10 years of absurd Mercantilism that has crushed 30% of the European economy, to say this latest round of catastrophe is because of a fine is myopic in the extreme.
Messy, indeed. But it's also a fine they wouldn't have had to worry about had their management not thumbed their noses at imposing adequate internal money laundering controls for a good chunk of a decade or so.
I don't know why the fine is lower, but it's the same order of magnitude...
[1] https://www.theguardian.com/business/2016/sep/16/deutsche-ba...
though isn't it 5,1x10e0 vs 1,4x10e1 and doesn't that mean it's not the same order of magnitude (I might misunderstand the concept)?
"Once the opportunity cost and risks are factored in, the schemes have represented a transfer from taxpayers to the financial sector."
https://www.nao.org.uk/highlights/taxpayer-support-for-uk-ba...
Why not also factor in lloyds dividend which resumed in 2015 and makes the UK government £200m a year?
But the effect was to go from a diverse ecosystem of banks to mono-culture. Lower costs and higher productivity but more risk of losing the entire crop.
It seems the better solution should be to conglomerate banks in recessions to make them more stable and more capable of financing companies and borrow money, and break them as soon as the economy is stable again and risks are no more that big.
How do we decide when that happens?
In a similar vein, we lower interest rates when the economy is in poor shape and raise them again when the economy is doing better. Unless the Fed can't decide that the economy is in good shape. For years.
Difficult to judge, and the Swiss have permitted giant banks to survive with fairly small problem... I can see why regulators choose not to set a limit.
What I don't understand is why most bailouts are so gentle on the banks' shareholders. Why doesn't the state tell each shareholder "you may provide money to help save the bank or let go of your shares, your choice, please decide by the end of next week"?
To your second point OP, over banking is a problem. If means more expensive banking operations which effects the whole of industry . Banking monopolies are the best of a set of bad options.
http://www.bloomberg.com/news/articles/2016-07-08/dare-to-dr...
You can't just let them be when they struggle because you'll end up paying double. It doesn't mean that banks don't end up "paying" especially if there was misconduct but it's not as simple as just giving them a cold shoulder.
If a bank is insolvent, as it looks like Deutsche Bank is, you've _already_ lost your money.
"You can't just let them be when they struggle because you'll end up paying double."
Bailing them out means paying double if they lose your money making stupid loans or ridiculous bets and then they get bailed out with taxpayers' money. They were already in deep trouble eight years ago and were bailed out. What did they do with that lifeline? Placed even more ridiculous bets with it, bringing in the bonuses but expanding the bank's debt to a whopping $42 trillion.
Besides, banks aren't special. They're businesses like any other. They need to go bankrupt if they make stupid business decisions.
"It doesn't mean that banks don't end up "paying" especially if there was misconduct but it's not as simple as just giving them a cold shoulder."
No of Wall Street executives prosecuted for the financial crisis of 2008: 0.
I disagree. Banks form the foundation of the infrastructure of the capitalist system. Failure of banks has a large effect on the businesses that rely on that system to operate.
That's the dictionary definition. What you're talking about is "the free market" - which is not the same thing as capitalism.
Treating them as the foundation of the infrastructure of the capitalist system and therefore somehow exempt from regulation, the law and the market is why the global economy is in such a mess today. There are no consequences any more to bad decisions by the global banks. They keep getting bailed out and bailed out and into more and more debt. One day the can will no longer be able to be kicked down the road.
Once you can't use an ATM, can't pay bills with direct debit, can't do anything then you've effectively lost your money. The problem is that DB is a commercial high street bank, and not only that it's one of the biggest banks in the world and across Europe.
Overall all the banks in Europe are in a mess http://ei.marketwatch.com//Multimedia/2016/09/28/Photos/NS/M... and it's not entirerly due to their fault, the negative interest rates implemented by the central banks didn't really help.
Please save us the sentiment which is actually likely to be out of place here because people have somewhat incorrect analogy to wall street and 2008 and say the banks are guilty, their employees/managers are criminally negligent and they should be put on trial.
DB isn't LB on many levels, it's haunted by it's ghosts, but what plagues it and every other major European bank is not the same, and in this case they aren't the only body at fault, the policies of the ECB and the local central banks in Europe so far were pretty devastating for the banks.
So, I would say, for most people in a country, if a single bank fails, you have nothing to worry.
If many banks fail, this is another story as they insurance pool of the banks may dry out.
Greece was a nightmare people don't really understand what was going on and the fact that they couldn't use an ATM, couldn't pay their bills, but at least that was a country wide issue.
When you get a similar situation but when one out of X people is left hanging in the wind because their bank has failed it would be considerably worse since there would not be a single unified emergency solution to cover them (in greece people stuck it out, there was even bartering, local stores had credit ledgers etc, GL getting credit from your local supermarket because your DB debit card won't work anymore), and when more banks start to fail because their investors and creditors lose faith and pull out (which is what happened to LB) it would make things worse and worse.
It's less than 20 days by law in my country and almost everything is done without depositor's input -- money are transferred to another bank and you simply come there with your ID to take your money in cash or open an account in another bank. I really wouldn't mind to wait a week or two as opposed to billions paid of tax money.
http://www.baltictimes.com/news/articles/30019/
So this isn't a case where a government let a bank fail, this is the traditional bailout mechanism for failed banks - the government buys them out.
This is what Latvia did with Parex, what the Netherlands did with SNS and Fortis, what portugal did with BPN and the list goes on and on and on.
For the most part no one let a bank fail the same way that the US did with LB, and no one would really want to try that with a commercial high street bank.
"When banks knowingly engage in irresponsible, or in Deutsche's case, criminal behavior it's people who end up losing money" is the spin I would put on it.
The question then arises - Should banks be allowed to go that big that would result into such a problem?
By many accounts, the second leg of the Great Depression of the 1930's started with the failure of an Austrian bank, Creditanstalt, in 1931, triggering financial panic and a wave of bank failures that ultimately affected everyone. See https://en.wikipedia.org/wiki/Creditanstalt#First_Republic , http://www.bloomberg.com/news/articles/2011-04-20/lessons-fr... and http://www.cambridge.org/catalogue/catalogue.asp?isbn=052103... , for example.
The world cannot afford to have another global financial panic. The outcome could be catastrophic. Lenders, including depositors like your Aunt Tilly and Jack the plumber, should not have to worry about the safety and liquidity of their money.
The financial system is infrastructure -- like the electricity grid and the Internet. We cannot afford to have this infrastructure come to a halt due to the fear or stupidity of greedy executives. Businesses and consumers depend on this infrastructure every day.
The key difference being that the financial system is a purely informational form of infrastructure. Where as the electricity grid and Internet are physical, real forms of infrastructure.
Information is far more easily recuperated (thanks to the internet/electricity grid) when a crisis occurs (i.e. a "bubble") than when a crisis occurs to physical infrastructure like the internet or electricity grid (i.e. an EMP).
You don't want to get all sweaty when the news starts coming in about the final death throes. Even if there's a guarantee (and there are in many countries), I would imagine there would be a period of limbo where it's very hard to get a hold of people who can assure you.
Meanwhile, there's plenty of other banks who seem a lot less likely to fail.
I also could tell a story about people losing access to their money for weeks, waiting on the FDIC, when IndyMac failed at the start of the recession. But it is not my story to tell as it did not affect me, and it was also one of the largest bank failures in US history, at a time when the FDIC was already undergoing stress, so I doubt it was malice.
I just wouldn't count on FDIC insurance to save you in the short-term if shit starts to hit the fan. Have a cash reserve.
Edit: Here's an interesting graph to ponder https://fred.stlouisfed.org/series/BKFTTLA641N
The first major cluster of failures actually preceded a crisis(the S&L crisis) and fell off rapidly after, whereas in 2008 the cluster was timed with the recession and had a longer tail of failures afterwards that continues to this day.
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.
https://www.theguardian.com/news/datablog/2011/nov/12/bank-b...
However: I encourage everyone to do like the popular story of how Iceland says we did :)
For all I know: Iceland let its banks fail and jailed some high-ups in said banks, while bankers worldwide said Iceland was going to have an endless recession because of it, which did not happen.
"The brave people of Iceland decided they had enough, and formed a lynch mob and put a few dozen perpetrators in a real, actual jail. Which didn't reverse the damage caused, by any stretch, but at least they got sliver of self respect back after being taken for a ride by these assholes."
Not sure how accurate that is, but any qualification (or just any articles at all you feel give a more grounded summary of events) would be very helpful.
How they did it: http://howto.monetary-reform.info/#sec-9-the-transition-to-s...
These are basically the famous last words before any bank goes bankrupt and consistently get's a government bailout in Europe.
This is especially important now when countries like Poland have the Euro hanging over their heads.
The Greek bailout, was an indirect bailout of Franco-German banks[1]. Ms Merkel was not able to ask for a second bailout, so she masked the bailout as a solidarity towards Greeks.
Of course Greece's public debt sky-rocketed (from 120% of the GDP to 180% in 6 years) but the worst part was the total disintegration of the Greek economy. Since, throwing money in failed banks never works, we're back in square one. Oh, in the process she also destroyed the Eurozone, but that's just a side effect.
[1] http://www.keeptalkinggreece.com/2016/05/04/german-esmt-stud...
It's no wonder that Schauble was pressing so hard 2 years ago for a big part of Greek Assets to be held abroad as guarantee the debt payments would be made... where? In DB non the less.
It truely was. German banks (and DB) was main creditors and could not afford Greece to default.
They borrowed low interest money at ECB (0.5-2%), spend it on high paying greek bonds with interest between 10-15% - but could not deal with the risk...
They're likely to keep it floating, take control of it, and demand that it is split into smaller pieces. Anything else would be completely irresponsible, especially if it's because of pride.
They didn't have that problem when it happened in other countries
Not sure what outlets you are using for getting your information, but there is no way Poland will implement Euro within next decade unless something catastrophic will happen to their own currency. The referendum won't go through and if the government will try to pass it without public approval you will see hundreds of thousands of people taking this to the streets. The western media do not understand the situation in central Europe. While Poland still being one of the biggest EU supporters, is actually supporting a conservative model of it, without any deeper integration when possible. Status Quo from 2010-2012 is what Poland wants to maintain its relationships with EU and only change they are looking for is a bigger influence in central Europe and EU offices.
I think that the main reason this can't be, is because of the Maastricht rules effectively blocked the creation of a proper banking union. Mario Monti, when he was Italian PM along with and Mario Draghi, tried to create a proper banking union, but Scheuble under the instructions of the Bundesbank blocked the procedure. Ironic isn't it?
Of course since Germany at this point could have the cake and eat it by bending the rules, but that wasn't the case for Italy 2 years ago.
We'll see. However, I believe that given the current state of disintegration in the EU it's politically toxic to issue another bailout to a major European bank while unemployment is in record-highs all over the European north and the south.
We now see the effect of this new knowledge about a previously opaque sector. Politicians and buraucrats are not as afraid any more. So banks cannot get away by having the tax-payer carry their risk.
[1] http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-stre...
DB is also not lehman brothers, so the 2008 analogy isn't exactly on the money.
2008 would have been better than 2016.
Today would be better than tomorrow...
It's just like when there's a big company meeting and the boss tells everyone you're going through hard times but everyone's job is safe. Or that the last round of redundancies was the final one.
Whether the government does bail them out can only be tested in one way.