What kind of game are the banks and the states playing? Here are four news items that should alert anyone still having faith in the european banking system.
Firstly, the european guidelines for using bank accounts in case of bankruptcy (bail-ins) have been adopted and will come into effect January 1st, 2016 (we’ve written about this last December 18).
Secondly, last week, the IMF came back with the idea of using bank accounts and implementing a universal tax on savings in order to reduce public debt. The institution had previously mentioned these (we’ve written about it last October 16). This time the IMF brings two famous Harvard economists to the stage, Carmen Reingart and Kenneth Rogoff, to explain that public debt has reached new summits not seen in 200 years and that, inevitably, we’ll have to resort to a cocktail of measures, including re-structurations, defaults and inflation...
Does the simple fact that these threats are uttered deter the banks from taking on as much risk? Is the Basel Committee, in charge of writing the prudential norms for the european banking system, hardening its position, as much as it could, to avoid having to resort to such extremes? Not at all, and this is the third news tidbit from Monday : Banks have obtained an easing of their leverage ratio which is coming into effect in January 2018.
What are we talking about here? Certainly not about the usual pondered ratio that we’re used to, about 7 to 10% (pondered because the debt of a AAA-rated country would rate zero, being considered without risk...), but about a « dry » ratio in which all banks’ assets are taken into account without questioning their risk level (in any case always difficult to measure). A more prudent ratio, sort of. And it should be at 3%.
But even 3% isn’t such an improvement, it’s even dangerous. It means that a bank can be involved in 33 euros with only one euro in the bank... If these involvements (state bonds, business and household credit, stock portfolio, derivatives) lose just 3% of their value, its reserves are taken away and the bank goes bankrupt. Let’s recall that Lehman Brothers had 30 : 1 leverage before it went under.
Well! It seems that 3% is still too much for the large european banks and, accordingly, they just obtained some easing of that rule! Which consists mainly in technical accommodations taking into account such things as net positions versus gross ones, maximum loss levels instead of total losses... we’re swimming in a sea of « anything goes » and of total irresponsibility!
But hey, why worry, why should we become prudent if, in case of banking failure, banks and states can use savers’ accounts directly? And, and this is the fourth piece of news, to make sure that the people won’t have time to protest, the procedure will be greatly accelerated. Sabine Lautaenschläger, Bundesbank’s vice-president and the German candidate to replace Jörg Asmussen, another German, as director of the ECB, stated on Monday that the Eurozone should be able to define in one weekend a re-financing and re-structuration plan of a failing bank. Just one weekend. A bank, in which the government was telling everyone to trust, is suddenly declared bankrupt on a Friday night and, on Monday, your account is cut by half. Simple, clean, efficient. One cannot stop progress...
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.