From City AM:
The idea of a bail-in [another name for 'debt-for-equity swap] is that if a bank hits the rocks, rather than phoning up the taxpayer for more equity capital, the bank automatically converts a chunk of its liabilities into new equity. This recapitalises it and allows it either to bounce back – or creates time for it to be wound-down in an orderly manner.
If such a system were in place, Barclays, RBS, Lloyds, HSBC and a host of global firm such as Credit Suisse, Deutsche Bank, JP Morgan and BNP Paribas could all easily withstand losing £40bn (the biggest one-year loss inflicted on a single institution during the crisis) without any taxpayer assistance.
In fact, all of these could bear much larger losses. The entire economic and financial history of the past few years would be dramatically different had countries stopped protecting creditors and made bail-ins the norm, or acted fast and enforced one as things went bad in 2008. Taxpayers would have stood protected and real market discipline reestablished.
As part of its submission to the ICB, Barclays calculated that it had a loss absorption capacity for the purpose of a bail-in worth 47.6 per cent of risk-weighted assets in 2010 – senior unsecured debt, but also Tier 2 and Tier 1 capital on top of the Core Tier 1. Under a £40bn hit and an equivalent bail-in, its loss absorption capacity would fall – but to a still extremely comfortable 37.4 per cent.
Of course, other reforms are needed too – not least new resolution procedures for large banks for whom bail-ins aren’t enough, as traditional bankruptcy procedures don’t work for systemic banks.
What all those numbers mean boils down to this: however bad bank losses are, they will never be so bad that depositors have to lose out (or certainly not as far as UK banks are concerned) and banks will certainly never just go pop. All that happens is that bonds are cancelled and bond holders are given shares to a similar value to the bonds which were cancelled. Big deal. And no taxpayer assistance required - as I've been saying all along!
On Radio 4 this morning, they talked about the ring-fencing, and said that the total value of assets inside the ring-fence (i.e. the bits you can understand, like mortgages and loans to business) would be about £2,000 billion, which is something else I have continually pointed out - the claim that banks' balance sheets add up to £7,000 billion or something (five times UK's GDP) is complete and utter hokum as the other £5,000 billion is made up numbers which all net off to very little indeed. (i.e. Bank A lends £100 million to Bank B who lends it to Bank C who lends it back to Bank A; on a strict balance sheet basis, the total gross assets and liabilities of these three banks has increased by £300 million, in real life, nothing has happened).
And Another One Gone
3 hours ago
9 comments:
Also Bond defaults are deflationary events so printing the money for the creditors shouldn't be a cause of inflation.
AC1
>(i.e. Bank A lends £100 million to Bank B who lends it to Bank C who lends it back to Bank A; on a strict balance sheet basis, the total gross assets and liabilities of these three banks has increased by £300 million, in real life, nothing has happened
"nothing has happened", Really? Risk has increased rather a lot, Yields have been pushed down.
AC1
AC1, I don't understand your first comment.
In the second example, risk to the outside world has only increased to the extent that governments bail out banks. If A defaults on its borrowings from C, C defaults on its borrowings from B and B defaults on its borrowings from A, then it all neatly cancels off to nothing.
I refer you back to my Megabank example.
The systems complexity has increased with no apparent extra work being done... That cannot be good for risk.
AC1
AC1, I didn't say that banks lending each other huge amounts of fantasy money was a good thing (it isn't), but what really causes the harm is when politicians bail them out. And if the banks knew they wouldn't be bailed out, they might be a bit less keen to engage in this tomfoolery.
Mark your observation is clearer if you point out that the incorrect 7,000 billion figure is arrived at because the >individual< banks assets and liabilaties are not being netted off in the bogus calculation. Now I get it anyway.
What has dissapeared though is the profits the banks in question were expecting to make.
The same netting off cannot be applied to the retail sector as there you have genuine savers who would be out of pocket. The netting off works where all the particpnants are investing borrwed money - do you concur.
Den, correct, the £2,000 billion left over is a residual hard core figure which represents real lending (albeit mainly secured on land and buildings) and real deposits.
Nobody ends up out of pocket because of netting, that's the whole point, it's like I happen to owe you £10 because you mowed my lawn, but your wife owes my wife £10 for babysitting last week, we could go through the rigmarole of paying each other or we could just write off the whole thing.
Yes, but if Bank A owes Bank B £10M and Bank B owes Bank C £10M and Bank C owes Bank D £10 and Bank D owes Bank A £10M, it all nets off to nothing, but if Bank B goes tits up, then Bank A might feel disinclined to pay Bank C the £10M it owed Bank B and Bank B owed to Bank C, so Bank A would be £10M better off and Bank C £10M worse off.
B, well exactly not. The liquidator of Bank B comes along, collects the £10m from Bank A and gives it to Bank B's creditors, i.e. Bank C. After helping himself to a £1 million commission, of course.
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