Macavity and the mysterious bank debt con
This morning the FT reports that the European Banking Authority is concerned about the sale of bail-in-able bank debt to retail customers who do not understand the risks. Quite right. But why do I remain the only voice raised against the far bigger problem for UK bank customers which everyone else ignores? (You can find my previous posts on this by searching “deposit” in the box on the right.)
Exactly the same concern applies to ordinary bank deposits in excess of the trivial Financial Services Compensation Scheme limit. You, and virtually every other depositor, seem to think these are not at risk because no one says they can be bailed in. But the only thing that will save them from total loss when a major retail bank goes bust is the Chancellor’s eyebrow. And the Chancellor has said that he won’t raise it. The market assumes he will.
Remember these banks are all vastly undercapitalised. They are riddled with scandals and poor practices and vastly overexposed to UK house prices which the Governor of the Bank of England seems finally to have understood are in a bubble (he should read this blog), so it is not difficult to imagine a scenario in which a bank’s net worth is wiped out by asset shrinkage. And when the assets are distributed in a winding up, you will find that the banks who have taken security come out first, those that have reimbursed the FSCS-protected deposits second (courtesy of the outrageous s.13 Financial Service (Banking Reform) Act 20013 which passed unchallenged), while ordinary depositors will share the unsaleable toxic residue that is left. To debate their precedence with that of the coco clowns is no more interesting than that of a louse and a flea.
The correct price for taking such de facto subordination must be closer to 10% p.a. than the 1% depositors receive. And yet of course no bank can pay 10% for its senior deposits as their business doesn’t generate sufficient profit to cover it. So UK banking continues to be supported by the taxpayer to a far greater degree than the press discloses – all hinging on our refusal to determine the eigenstate of the Mr Osborne’s eyebrow.
I suspect however that when it is collapsed, unlike Schrödinger’s feline, Osborne will survive, borrowing the Macavity mantle from one of his predecessors. Anyone who thinks they understand quantum mechanics doesn’t. But surely the journalists at the Financial Times could at least try.