In defence of big banks

Yes, I know.....big banks are bad things. They are widely believed to be systemically dangerous and a serious threat to the economy. "Break them up!" is the cry. But the facts say otherwise. My new post on Pieria gives a bit of a history lesson on financial crises and concludes that the most systemically-dangerous banks are not the most obvious ones.....
"My comment on the BBC's Newsnight programme that failures of big banks are very rare and that RBS was an "aberration" caused something of a storm. Some people said that they were "shocked and horrified" that I was "defending TBTF". Others complained about the behaviour of big banks in recent years. But I did not defend TBTF, and I did not defend the behaviour of banks. My comment was simply a statement of fact. Big banks fail very rarely. RBS's failure was the first failure of a big bank in the UK for over 100 years."
Read on here.



    It's an ongoing (onrushing) story ...

    1. Thanks Steve. It certainly is. What a mess.

      I ought to write about this, really. I think what we are confronting here is the heart of the cultural issues in banking. They don't see this behaviour as wrong - it's just "the way we do things". Collaboration between traders to move markets is no different really from collaboration between companies to fix prices, but they don't see it that way. They are just doing each other favours - which is how business works, isn't it? Consequently we are going to see this sort of collaboration across all markets, I think.

  2. "these small and medium-size banks depend on larger banks to provide essential payment services, deposit facilities and liquidity"

    Systemic and simple aspects of banking such as clearing and deposits should also be provided by the central bank to the broader economy not just depository institutions. The CB could provide a systemic refuge or risk free deposits. It could also directly interact with the broad public in monetary policy operations if it provided deposit accounts. The CB has economies of scale and scope compared to the private sector in providing payments and deposits meaning it could do it cheaper and provide a greater level of security while representing the interests of the citizens not shareholders.

    1. You can't have risk free backed deposits only low risk such as government bonds

  3. Great article! Besides, the same small size fetishism can be observed elsewhere in economic policy, e.g. small business being seen as good and worth supporting with subsidies or tax breaks however inefficient they may sometimes be.

    Also tantalising line about the mortgage as the system's riskiest construct. What about an article on moving away from nominal-based mortgages? More equity-like funding structures for housing (where you owe the lender a percentage of your house, not a nominal currency amount) would probably help make the system more robust.

    1. They have a system like that in Denmark, the Danish mortgage

  4. A mortgage crisis is a problem.

    The LIBOR, price index, the ratings, ... Did anyone tell others to include those 'numbers' into laws or contracts.

    No one told others to include terms like - we only allow AAA rated bonds for that kind of business. First people think - if we don't have enough AAA rated whatever stuff there is a huge problem. When that happens the stuff no longer AAA rated is the problem because the problem cannot be this huge.

    The price index (CPI) is kept (measured) artificially low because U.S. government expenses especially increases are based on that index.

    No one told the world to make them dependent on the LIBOR or define terms based on the LIBOR.

    No one told the European Union not to found their own rating agency. Let others make the decision for you and you get sold down the river - that's life. Don't think on your own and other ones will think for you.

    Especially politicians. In my hometown we have a 'SWAP scandle'. Long story short - a socialist mayor for whatever reason decided to finance the city via a foreign currency SWAP (I think). The major of the city proudly said - we will not only pay less interest - we will make money. The bank was a former socialist bank (union).

    First the EURO was strong, but suddenly the Swiss Franc became strong. Now the problem is 200 mio. or about 400 (no one really knows). First the bank director was a friend now he is the enemy ... no need to tell you. We will never know the truth.

    The cities excuse is now, the bank should never have allowed us to take the swap. The ex Councillor Of Finance Of the City said - the most speculative asset I know is a capital savings book. The major, 'I don't know even this'.:) The CEO of the bank said - the SWAP is not my problem - the bank and the city both said, 'We did not have a look especially on that SWAP'... No one had a look. When truth had to be faced, especially the city didn't want to see it and started to kick the can down the road hoping the EURO would become stronger.

    The whole story is a masterpiece ... that's just 10%.

    So you see a tiny bank can be hurt too but Deutsche Bank made similar deals with more communities in Germany.

    I am very careful with manipulation and such things. If there you leave room for speculation there will be speculation. No one is your friend in business. Not now and a lot less likely in the future.

    From defining key figures I can just say - almost every relative key figure is a problem. They say almost nothing especially in companies. Percent of annual sales ... today just absolute numbers. Anything else has not proven.

    1. The tiny bank I talk about is not the Deutsche Bank.

  5. Thanks for a very sane and rational article. Reading it reminded me that in any crisis the public demand a simple story that has strong elements of self-righteousness, and they don't care all that much if it's close to true. Hating big Banks is a lot simpler for most people than trying to understand how the system really works.

    In the US, there is an "Unofficial Bank Problem List" which gets published weekly. This year the number of small Banks in trouble, which has declined from 875 Banks a year ago to 677 today. At the height of the crisis it got very close to 1000.


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