What can stop the ‘too big to fail’ bankers from terrorising the world?

Irene Madsen, Team leader at the European Court of Auditors, Milan Martin Cvikl, and Angela Hodar McCann, Head of Unit at the European Court of Auditors (from left to right). Cvikl gave a press conference following the publication of the special report n° 5/2014 entitled "European banking supervision taking shape - EBA and its changing context" in which the European Court of Auditors assessed whether the Commission and the European Banking Authority (EBA) had satisfactorily carried out their responsibilities in setting up the new arrangements for the regulation and supervision system of the banking sector and to examine how successfully those new arrangements were functioning. The report found shortcomings in cross-border banking supervision, the assessment of the resilience of EU banks, and the promotion of consumer protection. (EC Audiovisual services, 2/7/2014).

Irene Madsen, Team leader at the European Court of Auditors, Milan Martin Cvikl, and Angela Hodar McCann, Head of Unit at the European Court of Auditors (from left to right). Cvikl gave a press conference following the publication of the special report n° 5/2014 entitled “European banking supervision taking shape – EBA and its changing context” in which the European Court of Auditors assessed whether the Commission and the European Banking Authority (EBA) had satisfactorily carried out their responsibilities in setting up the new arrangements for the regulation and supervision system of the banking sector. The report found shortcomings in cross-border banking supervision, the assessment of the resilience of EU banks, and the promotion of consumer protection. (EC Audiovisual services, 2/7/2014).

Last Monday 10 November the Financial Stability Board, an international non-binding body based in Basel which comprises government and central bank officials from G20 countries had a bright idea for the lenders. They admitted that the 30 “too big to fail” major world banks should retain at least 20% of their risky assets in own capital in order to save taxpayers the onerous burden of bailing them out when needed. FSB’s noble target is that those lenders should be able to go bankrupt without causing a global disaster, as Lehman Brothers did in 2008, nor counting on taxpayers to pay for their uncovered obligations, when they fail.

Obviously the FSB officials must have in the back of their minds the terrible thought that those banks are currently able to blackmail entire countries if not whole continents. There is no other way to explain why the major lenders are presently able to pocket the gains of their wild bets in all and every possible market, but hand the losses to taxpayers when the bubble busts.

Reckoning the unthinkable

In reality, the Board by recommending the retention of such massive bank reserves, indirectly recognises that for the time being and in the foreseeable future, taxpayers will continue to be held responsible or rather hostages being obliged to bail out the ‘systemic’ banks when they go bankrupt. It’s a fact then that the 2008-2010 credit melt down created not only a new kind of financial crisis, but also a powerful weapon in the hands of the major banks. The “too big to fail” lenders are nowadays quasi reassured that the governments will use taxpayers’ money to save them, if the real economy is to avoid the worst.

In real terms, taxpayers are offering free insurance to banks. There is a more to that though. Apart from governments who use taxpayers’ money, central banks come to the picture and engage in the rescuing of lenders and actually help them with subsidies to recapitalise and continue playing their unholy game. We saw it clearly happening before our eyes during the past six years. After the American, the European and other governments gave trillions to sustain the failing banks during the 2008-2010 crisis, the central banks took the relay and started refinancing them with even more trillions free of charge or at interest rates too close to zero.

Recapitalised for free

The banks use all that money and bet it in derivatives, third world risky financing and other obscure business usurping an important annual return on all that money. A rough estimate is that the major American banks got around $4 trillion from the US central bank, the Fed, at zero interest rate. Exploiting this bonanza for four years must have left them a net 20% to 25% or up to one trillion dollars. Then it was easy for them to buy back the shares the government had acquired, when it directly subsidized them at the peak of the 2008-2010 crisis. Apart from Lehman Brothers no other major bank shareholder or management team suffered any loss and they all kept their clout on their bankrupt institutions

FSB tells the truth

Now let’s return to Basel and the FSB’s idea for the restoration of adequate capital cushions in the balance sheets of banks. Mind you that until 1992 the banks were very closely monitored by regulators and draconian rules were applied in order to protect people’s savings. The first Bill Clinton administration started to seriously dismantle the up to then solid regulatory environment for the banking industry, a global policy line that freed completely the banks from any prudency control and rule by the turn of the millennium.

The 2008-2010 crisis awoke everybody and proved that the banks had been taking full advantage of their newly acquired freedoms and started creating their own money. They kept spinning their equity capital by tens of times and arrived at being leveraged by depositors and investors to up 30 to 70 times their own capital, according to the appetite of their shareholders and management team for risks. They didn’t discover anything new. From Adam Smith’s times, bankers tended to create their own money. That’s why the prophet of free market economics, when writing about banks he demanded tough controls and recommended even ethical scrutiny of bankers. He concluded that this profession tends to attracts villains and tends to turn honest businessmen into crooks.

Back to reality

Returning to current developments, the truth is that regulators on both sides of the Atlantic Ocean the closest they have come now to make the “too big to fail” banks responsible for their own bail-in, is the EU’s Banking Union. Still, this new European institution is based on the rather shadowy universe of the usual Brussels complex environment of regulations. Today’s Eurozone financial setting is built upon the Recovery and Resolution Directive, the Capital Adequacy Regulation and the peculiar Single Supervisory Mechanism. Even in this case though, five to eight years have to pass (not earlier than 2020) in order the Eurozone banks to be mutually resolved or rescued when failing, with Brussels jointly using member states resources.

As a result the lender of last resort remains the…taxpayer and the central bank. As for the US nothing that matters has changed there concerning bank prudency rules. US banks are practically operating in the same regulatory environment that led to crisis. No western government dared touch the critical issue of reserves. FSB is the first body to talk about 20% or even 25% prudency reserves. However, such an obligation will turn again bankers into blue-collar workers, miles apart from today’s Lamborghini addicts. As a matter of fact, the FSB demands that the banks should hold one fifth of their risk weighted assets as equity or debt held by investors who can take losses. This will change everything in the banking industry.

All that will force the bankers to either secure new huge equity and uncovered debt inscriptions or realize sizeable reductions of their investments/assets side of balance sheets or do both. The concomitant result will be an enormous reduction in profits and bonuses. And the question is if the banking sector can accept this prospect, even as a vague eventuality to start being negotiated in 2019, as the FSB proposes. Unquestionably, there is no other way than the return to mandatory and sizeable reserves/equity to make the banks again lenders of the real economy. Otherwise they will continue to terrorise us all…

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Women Empowering inside Medical Schools

JADE Spring Meeting 2017 – day 3: JADE Academy trainings, networking session and gala dinner – Excellence Awards winners revealed

3 ways to fight stress at work

Rule of Law: European Commission takes new step to protect judges in Poland against political control

The three biggest challenges for India’s future

Fleeing violence, Cameroonian refugee arrivals in Nigeria pass 30,000, reports UN refugee agency

How debt for climate swaps could spur a green recovery

Further reforms will promote a stronger and more inclusive Hungarian economy

Robots and chatbots can help alleviate the mental health epidemic

The EU Spring Summit set to challenge austerity

COVID-19: Why we must take the widescreen view of workforce uncertainty

Why this city is paying people to move there

To build a circular economy, we need to put recycling in the bin

Digital Single Market: New EU rules for online subscription services

The new crisis is already creeping into the financial system

Digital democracy: a Swiss view on digital trust

European Citizens’ Initiative: A game of much publicity and one big lie

Few countries are pricing carbon high enough to meet climate targets

East Africa locusts threaten food insecurity across subregion, alerts UN agriculture agency

Commission welcomes political agreement on Recovery and Resilience Facility

A day in the life of a refugee: the role of nations and citizens of the world

EU: Turkey to shelter Syrian refugees and turn other immigrants back in return of €3 billion

Team Europe increased Official Development Assistance to €66.8 billion as the world’s leading donor in 2020

COVID-19: MEPs call for measures to close the digital gap in education

Children are so hungry in one British town they are eating from bins

How man and machine can work together in the age of AI

COVID-19: A new drug is tested, and other top science stories of the week

Being blinded by labels stops social change. Art helps us see a better future

4 ways Africa can prepare its youth for the digital economy

I have a rare disease. This is my hope for the future of medicine

EU to relocate 40,000 migrants across the bloc: first step of a long due substantial reform?

Iceland to take vacated US seat on Human Rights Council

EU attempts to make new deal with Turkey as relations deteriorate

UN mission welcomes Afghan government’s announcement of Eid holiday ceasefire

Rehn ready to sacrifice part of the real economy

Regional competitiveness and growth: a Gordian knot for Europe

Can the EU afford a trade war with China?

Joint U.S.-EU Statement following President Juncker’s visit to the White House

Trump’s America divides the world, bullies China and Europe

China Unlimited – The chinese tourism in Lisbon

Rights of ‘gilets jaunes’ protesters in France, ‘disproportionately curtailed’, say UN independent experts

Antitrust: Commission opens formal investigation into possible trade restrictions by Mondelēz

Facebook-Cambridge Analytica: MEPs demand action to protect citizens’ privacy

Protector or polluter? The impact of COVID-19 on the movement to end plastic waste

The EU Commission lets money market funds continue the unholy game of banks

Learning lessons from across Europe – the hidden costs of COVID-19 on lung cancer

China repels EU allegations of export subsidies

The world needs carbon-neutral flying. Here’s how to bring it one step closer

Bolivia crisis: UN chief sends envoy to support peace, amidst renewed clashes

Failing to agree climate action would ‘not only be immoral’ but ‘suicidal’, UN chief tells COP24

Agreement reached on new EU Solidarity Corps

New identity cards deliver recognition and protection for Rohingya refugees in Bangladesh

UN ‘prioritizing needs’, ramping up aid, as Hurricane Dorian continues to batter the Bahamas

How this one change can help people fight poverty

Haitian President at General Assembly calls for essential development aid as UN mission shifts away from peacekeeping

Preventing and resolving conflicts must form ‘backbone’ of collective efforts – UN chief

Financing economic recovery, written by United Nations Under-Secretary-General

Commission welcomes provisional agreement on the European Climate Law

UN Chief says ending poverty ‘a question of justice’ on International Day

Go early, go hard and keep it simple: how Senegal is staying ahead of the COVID-19 pandemic

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s