Wednesday, 6 June 2012

Bank rescue. Chicken

Bank rescue
Today is the day where the EU should present its blueprint for salvaging the EU banks. In principle it is simple. We need an EU banking regulator, a deposit guarantee, and a big bag of money. But then the problems begin. Which authority should be given to the EU banking regulator? Who should be covered by the guarantee? And who is to pay? Enough open questions to ensure that it will take quite a while to make the scheme work.

There is one big issue that deserves some attention. EU has had as a principle to “protect smaller shareholders” who are supposedly “innocent” as regards the banks’ reckless lending practices. This principle stands in the way of something very important, the ability of the state/regulator/government to take full control over an insolvent bank.

Only by taking full control it becomes obvious to start the necessary process: to sell the non-performing assets, while the now government-owned banks can continue the activities that are absolutely indispensable in the society, namely payments and lending. 

It would then become possible to obtain an honest estimate of the losses. Eventually, it will lead to much smaller costs for the tax payers.

The key is of course that it is possible to temporarily suspend normal reserve requirements, because there is a deposit guarantee in place. As long as such a guarantee is in place, a nationalised bank can in principle operate without a capital base. 

It obviously requires that all shareholders must be wiped out. On this point I am more adamant that the EU Commission. It is normal capitalist logic that one can lose money through bad investments. There are no “innocent” investors. Protecting small investors should not stand in the way of providing a much larger public good: a restored and restructured banking sector.

The venerable game of Chicken is played in a variety of ways. One is when two young men on motorbikes race towards each other on the white line. He who first veers away from the line is Chicken. If both stay the course, there is no Chicken. Only two dead bikers.

Germany’s Finance Minister Schäuble has given an interview in Handelsblatt. Under the heading “No easy way out for Europe”, Schäuble says “If government debts are made collective, and it leads to lower bond yields in the debtor countries, it would reduce the pressure to solve the problems”. Written in black on white: Germany resists an EU solution because it would remove the pressure on the debtor countries.

Apart from the fact that Mr S forgets that Spain’s government debt is lower than that of Germany, he says in plain words that Germany is playing Chicken with the rest of Europe.

Could that end up as badly as Motorbike Chicken? I am not alone in fearing just that. Germany’s former Foreign Minister Joschka Fischer has written an analysis of the European problem. He ends it with the following warning: “Germany destroyed itself – and the European order – twice in the twentieth century... It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time.”

It cannot be stated any clearer than this.

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