4 ms·

As often with things in life, is there really a correct way? I mean, yes, there are laws saying banks cannot receive state aid, but they were only introduced re

As often with things in life, is there really a correct way? I mean, yes, there are laws saying banks cannot receive state aid, but they were only introduced recently. Does that really mean we should let a massive bank (or multiple banks) go bankrupt? Given the global financial system is so interconnected, only a fool would think this would have no impact to the german economy. I don't mind rules, but every rule is meant to be broken if the situation warrants it.

simonh 10y ago
You manage a German bank. You follow strict capitalisation rules, are careful about the loans you make and operate your business according to the highest principles. You clients start doing more and more of their business with an Italian bank that has poor capital reserves and a shoddy loan book and is losing money, but offers better terms to customers. The bank looks like it's going to fail, so the Italian government props it up with cheap credit and buys it's bad loans at above market rates so that it can stay in business - and keep winning business off you because it's still offering better terms to customers. Plus now those customers know the bank won't go bust and they can rely on it because the Italian government will support it no matter what. The customer's business is being indirectly subsidised by the Italian government through below-market banking fees. Why should they ever do business with you again?
- bonzini 10y ago
  > You manage a German bank. You follow strict capitalisation rules, are careful about the loans you make and operate your business according to the highest principles. Like Deutsche Bank? They were chock-full of bad derivatives, Greek bonds, and whatnot. Most of Italy's big banks are fine. They went just fine through the subprime crisis and the Greek bond crisis, and the government never had to save them. It's the smaller banks that have problems.
- mrighele 10y ago
  How is this different from European governments buying Greek bonds held by German banks [1] ? (Banks from French and Italy got similar treatment, but German banks where the biggest lenders) [1] http://www.bloomberg.com/view/articles/2012-05-23/merkel-should-know-her-country-has-been-bailed-out-too http://www.bloomberg.com/view/articles/2012-05-23/merkel-sho...
- Gmo 10y ago
  Except the German banks are not as clean as they would like you to believe, particularly the regional ones.
  - adrianratnapala 10y ago
    I read simonh's comment explaining why German banks were not particularly clean. That is, within the eurozone (or any equivalently open financial realm) if one country is willing to subsidise bad loans, then banks from all round will need to pile in on the scam.
pille 10y ago
> there are laws saying banks cannot receive state aid > every rule is meant to be broken if the situation warrants it Why did anyone bother with the rule in the first place then? Wasn't this exactly the kind of situation it was supposed to cover? It's not like an Italian financial crisis was off the radar when this rule got written. > Does that really mean we should let a massive bank (or multiple banks) go bankrupt? We've let pretty much everything else go bankrupt in the past eight years. Maybe we should try a it with a bank or two? > Given the global financial system is so interconnected, only a fool... That's exactly what the banks said last time to get their bailouts. I think only a fool would believe them again. (edit: quotes/formatting)
- charlesdm 10y ago
  1. What works for (relatively) small Cypriot banks will probably not work for larger system banks. The bail in rules worked well in part because the Cypriot banks held a lot of foreign, Russian deposits. If Deutsche goes bust.. winter is coming. 2. Bankruptcy will lead to local deposit funds having to reimburse €100,000 per person, per bank. Which will ultimately be paid for by the taxpayer. It might actually be cheaper for the taxpayer to just save the bank. At least in Belgium, the government actually got quite a good return on the emergency funds they lent to the banks during the financial crisis. So we're looking at a possible return vs a certain loss. I'm not saying all banks need to be bailed out, but it's only prudent to keep the option on the table if required. The world would be a different place if post Lehman governments would have let banks collapse.
  - pille 10y ago
    1. ... If Deutsche goes bust.. winter is coming. How, exactly? And if that's the case, isn't it already the failure that we're letting DB hold the world hostage? The world would be a different place if post Lehman governments would have let banks collapse Why does the solution to this scary, foreboding fate always revolve around making sure the bankers stay fabulously wealthy?
  - michaelt 10y ago
    It might actually be cheaper for the taxpayer to just save the bank. So, there are a few theories about why the financial crash happened: Theory 1: The [banking system / market / bankers paid seven-figure salaries] actually had little to no understanding of what they were doing. Complicated derivative products and credit default swaps were mispriced because nobody really understands the maths and their risk models are all wrong. This suggests, if we want to prevent the problem from recurring, the legislative intervention should be to either ban complex financial products or require much higher capital reserves for banks gambling on them. Theory 2: The [banking system / market / bankers paid seven-figure salaries] had accurate models and understood the risks. They just decided they could go to the roulette table and put a trillion dollars on red, and the government would bail them out if the ball landed on black. This suggests, if we want to prevent the problem from recurring, the legislative intervention should be to make bailouts radically less attractive for the people who benefit from such gambling. This could mean not providing bailouts, so banks that gamble and lose go bankrupt; or could involve some of the many other disincentives legislators have at their disposal. If you follow this theory, and you adopt the policy that there will be no bailouts, you have to let the bank fail to prove to people that you really mean it.

simonh 10y ago

You manage a German bank. You follow strict capitalisation rules, are careful about the loans you make and operate your business according to the highest principles. You clients start doing more and more of their business with an Italian bank that has poor capital reserves and a shoddy loan book and is losing money, but offers better terms to customers. The bank looks like it's going to fail, so the Italian government props it up with cheap credit and buys it's bad loans at above market rates so that it can stay in business - and keep winning business off you because it's still offering better terms to customers. Plus now those customers know the bank won't go bust and they can rely on it because the Italian government will support it no matter what. The customer's business is being indirectly subsidised by the Italian government through below-market banking fees. Why should they ever do business with you again?

bonzini 10y ago
> You manage a German bank. You follow strict capitalisation rules, are careful about the loans you make and operate your business according to the highest principles. Like Deutsche Bank? They were chock-full of bad derivatives, Greek bonds, and whatnot. Most of Italy's big banks are fine. They went just fine through the subprime crisis and the Greek bond crisis, and the government never had to save them. It's the smaller banks that have problems.
mrighele 10y ago
How is this different from European governments buying Greek bonds held by German banks [1] ? (Banks from French and Italy got similar treatment, but German banks where the biggest lenders) [1] http://www.bloomberg.com/view/articles/2012-05-23/merkel-should-know-her-country-has-been-bailed-out-too http://www.bloomberg.com/view/articles/2012-05-23/merkel-sho...
Gmo 10y ago
Except the German banks are not as clean as they would like you to believe, particularly the regional ones.
- adrianratnapala 10y ago
  I read simonh's comment explaining why German banks were not particularly clean. That is, within the eurozone (or any equivalently open financial realm) if one country is willing to subsidise bad loans, then banks from all round will need to pile in on the scam.

pille 10y ago

> there are laws saying banks cannot receive state aid > every rule is meant to be broken if the situation warrants it Why did anyone bother with the rule in the first place then? Wasn't this exactly the kind of situation it was supposed to cover? It's not like an Italian financial crisis was off the radar when this rule got written. > Does that really mean we should let a massive bank (or multiple banks) go bankrupt? We've let pretty much everything else go bankrupt in the past eight years. Maybe we should try a it with a bank or two? > Given the global financial system is so interconnected, only a fool... That's exactly what the banks said last time to get their bailouts. I think only a fool would believe them again. (edit: quotes/formatting)

charlesdm 10y ago
1. What works for (relatively) small Cypriot banks will probably not work for larger system banks. The bail in rules worked well in part because the Cypriot banks held a lot of foreign, Russian deposits. If Deutsche goes bust.. winter is coming. 2. Bankruptcy will lead to local deposit funds having to reimburse €100,000 per person, per bank. Which will ultimately be paid for by the taxpayer. It might actually be cheaper for the taxpayer to just save the bank. At least in Belgium, the government actually got quite a good return on the emergency funds they lent to the banks during the financial crisis. So we're looking at a possible return vs a certain loss. I'm not saying all banks need to be bailed out, but it's only prudent to keep the option on the table if required. The world would be a different place if post Lehman governments would have let banks collapse.
- pille 10y ago
  1. ... If Deutsche goes bust.. winter is coming. How, exactly? And if that's the case, isn't it already the failure that we're letting DB hold the world hostage? The world would be a different place if post Lehman governments would have let banks collapse Why does the solution to this scary, foreboding fate always revolve around making sure the bankers stay fabulously wealthy?
- michaelt 10y ago
  It might actually be cheaper for the taxpayer to just save the bank. So, there are a few theories about why the financial crash happened: Theory 1: The [banking system / market / bankers paid seven-figure salaries] actually had little to no understanding of what they were doing. Complicated derivative products and credit default swaps were mispriced because nobody really understands the maths and their risk models are all wrong. This suggests, if we want to prevent the problem from recurring, the legislative intervention should be to either ban complex financial products or require much higher capital reserves for banks gambling on them. Theory 2: The [banking system / market / bankers paid seven-figure salaries] had accurate models and understood the risks. They just decided they could go to the roulette table and put a trillion dollars on red, and the government would bail them out if the ball landed on black. This suggests, if we want to prevent the problem from recurring, the legislative intervention should be to make bailouts radically less attractive for the people who benefit from such gambling. This could mean not providing bailouts, so banks that gamble and lose go bankrupt; or could involve some of the many other disincentives legislators have at their disposal. If you follow this theory, and you adopt the policy that there will be no bailouts, you have to let the bank fail to prove to people that you really mean it.