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The logical consequence of where we’re heading

1 April 2013

What a droll April Fool’s story in today’s Financial Times. Andrew Bailey (“Watchdog seeks clarity on bank capital”) wants us all to see inside the black boxes of bank supervision as the “logical consequence of where we’re heading to”. So, because regulators, armed with extra information, have failed so miserably to head off collapse, depositors, ranging from old age pensioners with their life savings to small businesses that are deemed incapable of understanding an interest rate swap, are to take over their job. Armed with slightly more, still out-of-date information they are to perform credit analysis on entities that hold some of the most complex instruments ever devised, that are 97% debt funded, that pay out to employees close to all reported profits, that have an industry-wide tradition of underprovision for liabilities and a history of malpractice from mis-selling to fraud. They are in effect so bust that other banks won’t lend either, unless they have security over the saleable assets (which means that the recovery rate for uninsured depositors will be even worse than in a pari passu liquidation). And the sanction if you don’t like the result is to move your deposit to another bank with much the same record in a market notorious for its lack of competition. Jeroen Dijsselbloem may have been the first to spell out clearly where Mr Bailey thinks we’re headed, viz. the bailing in of depositors, treating them as investors, but regulators have until midday to see the nonsense of making it impossible to use banks for banking.

My modest proposal is to take these ideas one step further:  since depositors are likely to cause a bank run when you threaten to expropriate their assets, why not simply uplift borrowers’ liabilities, adding say 20% to everyone’s mortgage? They can’t run. Simple. Remember to add enough for the bonus round.

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From → Finance

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