Europe strikes deal to push cost of bank failure on investors

[achilles28]

Quote from Martinghoul:

Bail-in's are the right thing to do. The Danes were the first (after the crisis) to do it in February 2011 with Amagerbanken and they were 100% right. Taxpayer should be senior to the most senior bond holder and only junior to the insured depositor, period.

As to derivative exposure, achilles, stop listening to Dyler Turden. There are derivatives and there are derivatives. A notional of a derivative (which is what people use for their shocking "leverage" numbers) is a meaningless number. Otherwise, every single Eurodollar punter should be running for the hills.

I wouldn't be so quick to poo poo the derivative numbers. Remember 2008? That was five years ago. Nearly half the global banking system was insolvent. Notional matters during crashes (which statistically, occur with much more regularity than previously thought). The vast majority of derivative exposure is dotm puts against various assets classes - "blackswan insurance". When another 08 hits (and it will), it'll be aig all over again, except system-wide. JPM has over 80 trillion derivative exposure, alone. Insuring against 'unfathomable outcomes' (like the 2008 housing crash).

Central banks hold the ace card. They indirectly prop derivative values through purchasing the underlying via qe. But once they resolve to unwind their balance sheets, its done. Only a matter of time, mathematically speaking. The question is, will they? The qe is really just a backdoor bailout to the banking system, in effect. Bailins are sorta a political bone meant to assuage the vox populi who don't understand the real hand propping the market. Which I do agree with, btw (bail-ins). However, combining investment and commercial banking under one roof is suicide (house gambling with depositor money). Really, it's no different than motherf*cking global, refco, bear, lehman etc, except with a fancy sign, bigger building, and more customer deposits.

 

[achilles28]

Quote from Lojanica:

Kinda what I was alluding to. The metals were a fear trade combined with a cyclical bull market all wrapped up with hyperinflationary bow.

There may be merit to buying up some physical metal once the current metals bear market ends and before the next cycle of bursting bubbles.

Yup. 100% agree. It boggles the mind that crashes 'can't happen again', when we're 5 years out from the worst one since the Great D...???

I think what happens next crisis, is a gigantic changing of hands - from "establishment" banks and their middle class depositors, to speculators, hedge funds and gamblers who went long protection. It's ridiculous. Sure, its financial Darwinism. But we take the value creators capital, to pay off gambling debts to speculators, so a shitty bank can be "Saved". It's not right.

 

[4thaugust1932]

https://en.wikipedia.org/wiki/2008–11_Icelandic_financial_crisis

 

[Martinghoul]

Quote from achilles28:
I wouldn't be so quick to poo poo the derivative numbers. Remember 2008? That was five years ago. Nearly half the global banking system was insolvent. Notional matters during crashes (which statistically, occur with much more regularity than previously thought). The vast majority of derivative exposure is dotm puts against various assets classes - "blackswan insurance". When another 08 hits (and it will), it'll be aig all over again, except system-wide. JPM has over 80 trillion derivative exposure, alone. Insuring against 'unfathomable outcomes' (like the 2008 housing crash).

Central banks hold the ace card. They indirectly prop derivative values through purchasing the underlying via qe. But once they resolve to unwind their balance sheets, its done. Only a matter of time, mathematically speaking. The question is, will they? The qe is really just a backdoor bailout to the banking system, in effect. Bailins are sorta a political bone meant to assuage the vox populi who don't understand the real hand propping the market. Which I do agree with, btw (bail-ins). However, combining investment and commercial banking under one roof is suicide (house gambling with depositor money). Really, it's no different than motherf*cking global, refco, bear, lehman etc, except with a fancy sign, bigger building, and more customer deposits.

As I have mentioned in our other conversations, I remember 2008 all too well. I was right in the middle of that sh1t and I still have the scars.

So I am 100% in total, unwavering agreement with you re: Glass-Steagall. It's shocking that there's been no progress in the US on this issue whatsoever, just like there's been virtually no progress on TBTF, in spite of attempts like Brown-Vitter. Even here in the UK, they have achieved more and the financial services sector here is a larger portion of GDP than in the US. It's the power of the US banking lobby and it's why people like Charles Calomiris and Larry Summers infuriate the sh1t out of me.

On the derivatives issue, I am, in contrast, in complete disagreement with you. I think you're, with all due respect, barking up the wrong tree. If you want me to, I am happy to go through my argument again, like I did in one or two older threads.

 

[Ghost of Cutten]

Quote from Martinghoul:

There's an argument that some degree of protection of deposits is a) efficient; and b) actually can prevent large systemic crises. I happen to agree with that and we have empirical evidence to that effect. However, above and beyond the threshold, what you say above is spot on.

You probably meant Cyprus? Even there they finally decided to leave the insured deposits alone, thank god. So far, in the West, I am not aware of any sovereign violating its depositor insurance guarantee (unless you consider Iceland and Icesave a violation, like I do).

Yep I agree that some deposit insurance is useful in a fractional reserve system. However I think it works with a limit. 100k is enough to cover most people, the man on the street. Anyone with >100k at one bank is rich enough to be able to operate on caveat emptor. Some basic financial education of the populace at schooling age would help as well.

There is another argument that this is an unfair subsidy of fractional reserve systems, and crowds out full reserve banking, whilst massively increasing systemic risk both from banking collapses and hyperinflations.

IMO a superior approach would have some regulated full reserve banks which just take deposits and loan them out, a bit like the building societies in the UK. Those are where people could put their 'can't lose' savings, and could have a government guarantee if necessary (mostly in case of massive fraud). Then the rest of the banking system can operate on whatever fraction it likes, with no government subsidised insurance at all, and people can choose their poison. If you want to chase yield, use a fractional reserve bank. If you want security, use a full reserve bank.

Basically, any bank with ANY government banking should not be taking meaningful risk, it should be just providing a basic service as safely as possible.

About default I meant Greece defaulting on their debt - i.e. you can't always trust the sovereign to back up the deposit insurance. Other examples like Argentina show that insured deposits can be totally wiped out in a crisis.

 

[Ghost of Cutten]

Quote from Martinghoul:

Bail-in's are the right thing to do. The Danes were the first (after the crisis) to do it in February 2011 with Amagerbanken and they were 100% right. Taxpayer should be senior to the most senior bond holder and only junior to the insured depositor, period.

As to derivative exposure, achilles, stop listening to Dyler Turden. There are derivatives and there are derivatives. A notional of a derivative (which is what people use for their shocking "leverage" numbers) is a meaningless number. Otherwise, every single Eurodollar punter should be running for the hills.

Why should taxpayers be funding bank depositors? I mean in a moral sense. Since ultra-safe t-bills are available directly to all citizens, I can think of no reason why money extracted by force (tax) should be funding private capital which seeks safety. Especially when you consider that tax (via sales tax, VAT, tax on booze/cigarettes etc) is extracted to some degree from the poor, who generally have only minimal bank deposits. Backstopping deposits is basically a tax on the poor to bail out the rich and the middle class - this is like regressive taxation, morally indefensible. It also taxes prudent savers to refund imprudent savers, so it is a perverse incentive.

I agree Iceland was a default on deposit insurance, but I think that was the right thing to do. Depositors in Icelandic banks were free-riding yield-hogs, then when their fat returns turned negative as credit risk came home to roost, they wanted Mr and Mrs Gundarrson to bail out their speculative personal hedge funds. I wish they had lost even more than they did.

 

[Martinghoul]

Quote from Ghost of Cutten:
Why should taxpayers be funding bank depositors? I mean in a moral sense. Since ultra-safe t-bills are available directly to all citizens, I can think of no reason why money extracted by force (tax) should be funding private capital which seeks safety. Especially when you consider that tax (via sales tax, VAT, tax on booze/cigarettes etc) is extracted to some degree from the poor, who generally have only minimal bank deposits. Backstopping deposits is basically a tax on the poor to bail out the rich and the middle class - this is like regressive taxation, morally indefensible. It also taxes prudent savers to refund imprudent savers, so it is a perverse incentive.

Well, it may be efficient to backstop "some" deposits in the interest of having a banking system that is not completely reliant on the state during times of stress. However, it's also very true that too much of a good thing can breed moral hazard and introduce other unpleasant issues. So in this case, like with most other things in life, it's important to find the right balance.

Furthermore, you could, sorta, argue that you could, in theory, make the deposit insurance levy a tax on the banking industry, rather than the taxpayer. If the banking industry in the US weren't so concentrated and not particularly competitive, that might actually be the case.

Generally, I can point you to a couple of really good papers that discuss these issues and that can make the case a lot more eloquently.

 

[Martinghoul]

Quote from Ghost of Cutten:
Yep I agree that some deposit insurance is useful in a fractional reserve system. However I think it works with a limit. 100k is enough to cover most people, the man on the street. Anyone with >100k at one bank is rich enough to be able to operate on caveat emptor. Some basic financial education of the populace at schooling age would help as well.

Yep, 100% agreed.

There is another argument that this is an unfair subsidy of fractional reserve systems, and crowds out full reserve banking, whilst massively increasing systemic risk both from banking collapses and hyperinflations.

IMO a superior approach would have some regulated full reserve banks which just take deposits and loan them out, a bit like the building societies in the UK. Those are where people could put their 'can't lose' savings, and could have a government guarantee if necessary (mostly in case of massive fraud). Then the rest of the banking system can operate on whatever fraction it likes, with no government subsidised insurance at all, and people can choose their poison. If you want to chase yield, use a fractional reserve bank. If you want security, use a full reserve bank.

I have said this many times. Full reserve banking doesn't work and doesn't exist other than a purely theoretical concept. It certainly won't be viable in an environment where full reserve banks are expected to compete against the fractional reserve ones. UK building societies are emphatically NOT full reserve banks. They do confine themselves to specific activities (take in deposits, lend mortgages), but they're all pretty nicely leveraged.

Basically, any bank with ANY government banking should not be taking meaningful risk, it should be just providing a basic service as safely as possible.

Yes, agreed 100% there. As I have said a number of times, there's a perception that banking is another "public good", like sanitation or public order. If that is indeed the case, I find it utterly ridiculous that it's not regulated and controlled by the state in a way that's consistent with the assumption.

About default I meant Greece defaulting on their debt - i.e. you can't always trust the sovereign to back up the deposit insurance. Other examples like Argentina show that insured deposits can be totally wiped out in a crisis.

Well, sovereign debt and bank deposits are different animals. Greek insured depositors didn't have to suffer a haircut, I am pretty sure. Argentina is a different story, indeed, but that country is special in some many ways.

 

[StarDust9182]

Interesting discussion.

I agree with M, that the root cause is fractional reserve banking system itself. If all loans were at risk to the lender's money only, the system couldn't blow up and the risk signals wouldn't be compromised. A bank should earn money as a broker, not as an investor with funds it doesn't have or create through any capitalist value. IMO, to take any depositor funds to cover an entity that put nothing significant in, is ridiculous. Yet here we are. Our banks are socialist constructs which increases the system risk.

In the fractional reserve system, risk is assumed to be disappear on any individual loaner. In reality it's simply transferred to the system itself. Risk grows as the exponential guaranteed failure approaches until the system cashes in it's risk card in one supernova explosion. (If all interest is fiat and zero interest rates are impossible, then failure is certain one day.)

A second part is that there can be no safe store of value for money. (a zero risk proposition) Otherwise, bank runs are inevitable as bad decisions are made and people flee to safe stores. That is why the system will destroy any such attempt to create it - the game is up. Today our banks come hat-in-hand to the suppliers and creators of real capital. Full reserve banking is one safe store of value and so has to be attacked.

Insurance can't work unless there are no black swans since one needs to cover the risk with premiums. One can't premium an unknowable risk in a market that continually drives the prices down based on the known risks.

Leverage also stores risk and the higher the leverage, the more the risk if something unforeseen happens. And something unforeseen always happens or there would be no risk at all!

 

[StarDust9182]

The capitalist system is about accepting risk (in return for reward proportional to said risk) and socialism is about getting someone or something else to assume that risk and getting something for nothing.