Monday, 16 February 2009

Banks are not too big to fail, never have been, never will be.

CityUnslicker says in the comments to my previous post "Banks are too big to fail. If they went bust the confidence in the UK would go with it. The currency would collapse and the UK could also default on its debts."

Nope. Banks are like utilities - water, electricity, gas - they provide a vital service, but it does not matter particularly who provides that service. If a company that owns loads of power stations went bankrupt because of malinvestment and because it was overloaded with debt, the administrator would promptly sell off the power stations to somebody else, and customers wouldn't even notice a flicker.

It's no different with banks - take for example the Bradford & Bingley. One of the few masterstrokes that this government has pulled was to sell all the B&B's branches and transfer the liability to repay its customer deposits to Santander. If you were an employee of or a depositor with B&B, or the landlord of one of their branches, you wouldn't have noticed the change had you not read it in the newspapers.

This comes pretty close to the New Bank solution that CityUnslicker himself proposed a few months ago.

The mistake that the government made with the B&B was to 'nationalise' the loan book. They should have declared it a 'closed fund' and just let the shareholders and bondholders squabble over the meagre spoils, which is what I suggested after Northern Rock first went *pop* back in September 2007, which seems like ancient history somehow.

Further, our currency has already collapsed and is now bumping along the bottom, and if the government palmed off the losses onto private investors (where they belong) rather than nationalising them, the chances of "the UK defaulting on its debts" would actually be reduced.

Ah well, better luck next time. You can't expect a Labour government to have already learned the lessons of what was blindingly obvious to me a year and a half ago.


Tim Almond said...

The bailouts to the banks are nothing but a money-go-round with added friction.

Let's say there's no bailout. I've got the money in my account to buy a new Dyson cleaner, so I do. Dyson get some money, I get a cleaner and we're both happy.

Bailout the banks and that's got to come from somewhere. Either the government takes it from my account or borrows it to devalue the currency. Either way, the value is the same.

So with a bailout, the government takes the money from me, hands it to the banks, and then Dyson have to go to them to get a loan because they lost a few customers that they would have had if it weren't for the bailout. So, rather than actually helping business, it adds extra interest costs on to them.

The Economic Voice said...

The banks are in sheer survival mode and have managed thus far to convince the decision makers that they are too big to be allowed to fail.
Most people I talk to just want the bad ones to sink quickly so we can get through this in short order.

CityUnslicker said...

If it were about pure economics I would agree.

let's say RBS goes bust next week, after syaing there is another £15 billion hole in its accounts.

How do you think the market would view the other big banks at that moment? i think they would be reduced to penny stocks at best.

Then you have the wider issues around complex derivatives etc. some are netted out, some cause huge losses to counter-parties.

I am all for a new bank, to slowly replace the zombie banks we have. But in an orderly manner not in a shock.

Back in october i was all in favour of letting lehman go down as it was clear they were bust. but that caused a major shock to the world economy.

If one of our big banks went down we would be iceland. And then we woudl see the pound at 3 to the euro not one.

managed decline, which the govt has arrived at by accident, is the most sensibel way - like any attempt at bomb disposal!

Mark Wadsworth said...

CU, you are over-dramatising:

"let's say RBS goes bust next week, after syaing there is another £15 billion hole in its accounts."

OK, let's assume that RBS has liabilities in excess of assets of £15 billion, that's less than one per cent of it's total stated assets of £1,900 billion as at December 2007.

The bank gets split into two, like B&B - a New Bank with the branches and employees, the customer deposits (i.e. liabilities), the computers etc. The rest of the assets side become a become a closed fund 'owned' by shareholders and other creditors.

Let's assume that customer deposits of £682 billion are repaid in full (or up to the guaranteed £50,000), and that shareholders equity of £91 billion is wiped out. That means that other creditors of £1,127 billion 'only' get repaid £1,112, or 98.7 pence in the £1.

Hardly a world-changing event, is it?

Letters From A Tory said...

It's amazing how people have completely forgotten that banks are a service - we don't have to use a bank, we do so because we get something in return, be it interest on our savings or something else.

This whole crisis has hopefully reawakened the general public that banks can come crashing down like any high street shop.

Tim Almond said...


"Then you have the wider issues around complex derivatives etc. some are netted out, some cause huge losses to counter-parties. "

So? What's that got to do with anything? Derivatives are just insurance/gambling and basically a zero-sum game. Some people win, some people lose. We have welfare for the losers. This is no justification for propping up the banks.

Mark Wadsworth said...

Further to TA's point, let's not forget that when Lehman went *pop*, the total derivative losses were only $6 billion out of nominal $400 billion, a tad more than one cent in the dollar, but hey, that's a high risk business.

Umbongo said...


To go off at a tangent - saying there's been a $400 billion derivatives black hole is like saying that the Madoff Ponzi scheme was a "£50 billion" swindle. It wasn't - that figure includes "phantom profits" ie what investors (ha!) would have received if the Madoff miracle had worked. I suspect we're talking £5 billion max of real losses here - maybe much less.

Mark Wadsworth said...

U, that's not 'a tangent', that is another good example of the same sort of thing.

Lola said...

Re your last paragraph. What's so galling is that labour governments NEVER learn. They make the same mistake every time. They run out of other people's money. Or more accurately. Vote left. Vote Wealth Destruction.

AntiCitizenOne said...

Socialists always run out of other peoples money to steal.

Anonymous said...

Most of what's gone wrong was blindingly obvious at the time of the implosion of the last Labour Government, but there you are, those who do not understand history are doomed to repeat it.