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Comment by mrweasel | Hacker News Reader

While I understand why have Deutsche Bank fail could be a huge issue, I also believe it's necessary to show that banks are responsible for their own bad decisions.

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.

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In this case it's messy because DB problems are caused by a US government fine, a fine that realistically they wouldn't have imposed on a major US bank. So it's less about individual bank performance but rather international politics and trade barriers.

"In a similar case, rival Goldman Sachs agreed in April to pay $5.06 billion to settle claims that it misled mortgage bond investors during the financial crisis." [1]

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...

Thanks for the link,

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)?

Not to put too pedantic a spin on ballpark expressions, but the 5 rounds up to 10

I think you don't round up, both have 2 significant digits.

I may be seriously out of date, but "order of magnitude" was (c.1990s, and again, pedantically) the nearest power of 10. This is the way we taught it as well (those estimation problems in the first chapter of your physics text). Conversationally it was used more with a "wild ballpark" meaning. We would say "of the order of 3000" but strictly 3000 was of the order of 1000. 5000 was of the order of 10000. Etc.

Are they different by a factor of 10 or more? If not, then they're within an order of magnitude (base-10).

Thanks, this is my definition too!

Except the fine hasn't actually been imposed. The actual fine will be about half, or less, which will be in line with expectations.

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.

DB has capital structure issues. The fine is only the proverbial nail in the coffin.

The US government would impose a fine, it would just be an inconsequential one. Like the one they imposed on Wells Fargo that was less than the CEO alone made partially due to the fraudulent accounts the employees set up.

A fine that realistically they wouldn't have imposed on a major US bank.

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.

Sadly bailouts have not been a money maker in the UK thus far. They may still have been the least worst option though.

"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...

As with the east coast rail, channel tunnel and royal mail, it's likely the UK government will divest its shares just as RBS etc turn a corner and become relatively profitable (however far in the future that may be). I'm not sure if it's due to incompetence or something more sinister, and tbh I'm not sure which would be worse.

> "Once the opportunity cost and risks are factored in, the schemes have represented a transfer from taxpayers to the financial sector."

Why not also factor in lloyds dividend which resumed in 2015 and makes the UK government £200m a year?

That is a quote from the National Audit Office website, which says it is based on Treasury data to the end of the 15-16 financial year.

That's a substantial sum, but to put it in perspective remember that the bailouts themselves cost many many billions

In the US at least regulators actively encouraged banks to consolidate prior to the financial crisis. Regulating a few large banks was thought to be simpler than regulating a larger number of smaller banks. Smaller banks also were typically regional which had the effect of concentrating risk. For example a crash in a commodity like oil or corn would take down many banks in a region and exacerbate the regional downturn. Larger banks had a more diversified portfolio and could better weather a regional downturn. Larger banks also reduce the risk of a run on the bank because during a run the money tends to simply slosh between large banks.

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.

What I understood is that small banks have also smaller capitals and warranties, so in a situation where you want them to land as much money as possible to try to get out from a recession via capital investments all the small banks became pretty useless because they can't take the risk.

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.

> break them as soon as the economy is stable again

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.

It's not easy to draw a line and determine which banks pose systemic risk. A bank that poses no systemic risks today may do so in three years, because two of its similarly small rivals are a little weak at that time and might fall over if this particular bank does, and the loss of all three would be bad.

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"?

I second OP. Broadly I think the EU project are pushing back on the economy over politics paradigm given the general and endemic failure of credit cycle economics and the Brexit and migration meddley.

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.

Regarding the second point, can you give an explanation of why you think that is the case? Normally more competition leads to lower prices. Why should banking be special?

Because of the effect of aggregation on the price of transactions and operating profit. Have a read through the rationale for these merger ideas here to understand more :

http://www.bloomberg.com/news/articles/2016-07-08/dare-to-dr...

When banks are held responsible its the people who end up losing money.

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.

"When banks are held responsible its the people who end up losing money."

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.

There is lost your money, and there is lost your money. Technically once you gave money to the bank you've lost it, what you've gained is a body that would tell other people on your behalf "it's ok i got him covered".

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.

> Besides, banks aren't special. They're businesses like any other. They need to go bankrupt if they make stupid business decisions.

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.

Is it really a capitalist system if the foundational infrastructure is ultimately public (the state), not private?

Yes it is. Capitalism doesn't mean an absence of government or make any distinction between private or public ownership, it simply means that the way resources are distributed is through a market system. In order for the market to operate a means of exchange that we all agree upon and trust is required. This is money. Banks manage the market system's means of exchange. If something happens that impedes the exchange, the system is compromised.

capitalism: an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

That's the dictionary definition. What you're talking about is "the free market" - which is not the same thing as capitalism.

If we are nit picking... What I am talking about is free market capitalism. The definition you quote talks about trade and industry - which we can reduce down to calling the means of production. Capitalism is about ownership of the means of production for private gain. It doesn't exclude government ownership of resources / means of production or indeed and perhaps most importantly the money system. I think you could even argue that public ownership of the money system facilitates the capitalist economy. What does the central bank / federal reserve do?

Market-communism is an actual ideology. Capitalism does not have any kind of monopoly on the use of market mechanisms.

I agree, but that is not a license to operate with impunity. They must either be heavily regulated or allowed to fail. Neither is not an option.

That still doesn't make them special. The failure of any essential service provider or business partner can have a crippling effect on a business. That's just a risk you take precautions against as part of normal day to day operations.

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.

As a simple customer of the bank, your money there is ensured up to €100k. If you own stocks, you own them in full you can move them away without issues.

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.

Insurance takes time to claim, when banks fail the financial services stop functioning, when your payments don't clear you are at considerably greater risk than when a bank is insolvent and can't consolidate it's outstanding accounts with the central or its peering banks. Commerzbank is in almost of a bad shape as DB, same goes for many other banks in the EU and Germany.

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.

"Insurance takes time to claim"

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.

As someone living in a country where one of the biggest banks was robbed to fund hostile takeovers and media propaganda for many years (€3Bn spent on that), I can assure you that the law means jack shit.

During last 5 years 2 banks have went bankrupt in my country (Lithuania), so I can assure that this insurance works really well here, everything went orderly and individual depositors received their money promptly (in about a week if I remember correctly).

Lithuania nationalized the shares of it's failing banks, which was in effect a bailout. When Snoras failed your government bought out 100% of it's shares and facilitate the recovery of the deposits.

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.

Ah, my bad then, I wasn't much into details, the titles on most media was literary "Bank X went bankrupt".

I had 3 greek colleagues that would disagree.

You might not really mind for a week or two. Businesses and people relying on payroll being hit on time certainly do mind, and the longer it gets backed up the greater systemic effects it can have.

When banks are held responsible its the people who end up losing money.

"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.

> Bank that are to big to fail.

The question then arises - Should banks be allowed to go that big that would result into such a problem?

That's precisely what the parent is asking in the first place.

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