

Global banking

You break it, you own it

America should give global banking rules—and Europe’s dilatory regulators—one last chance

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The never-ending dishonesty of the financial markets, including the business media who shamelessly promote them, is despicable.

US banks are now 30% LARGER than they were during the financial meltdown, and most of the so-called financial reform done in 2010 has NOT been implemented, thanks to corrupt Republicans.

NOT ONE BANK has had to face any kind of real penalty and not ONE CEO has even been charged for what we KNOW were CRIMES. Instead, they continue to be handed money from the Fed at obscenely low interest rates while homeowners who got screwed by them are getting NO HELP AT ALL.

Thanks, Economist, for once again proving that it's not just the banking system that is utterly CORRUPT, it's anyone or anything that comes into contact with them - especially the media.


I am so sick of everyone talking about the well capitalized american banks, when they do not calculate capital requirements on a consolidated basis. For the record - that means double gearing without an end.
Also - US banks only make the basel III leverage ratio because of their incredibly loose netting rules for derivatives.
Under the line - if you calculated Goldman Sach's consolidated basel III capital requirement and used IFRS netting rules, I seriously doubt if it is better capitalized than any German bank.
Furthermore, talking about the "less capitalized smaller" German banks shows a remarkable lack of knowledge about the German banking market. The smaller sparkassen (savings banks) and volksbanken (mutuals) have a statute that keeps them from risky operations and rather directs them to provide plain savings accounts to as many German savers as possible. They bailed out every single larger German bank in trouble during the crisis and are still doing pretty well.
I'd expect the economist to do a bit more research in such matters.

WYY6 in reply to Ameribugger

Wonderful! This is consistent with "How the Media Blows Bubbles" with reference to a comment made by Robert Schiller at a conference in Orlando recently. Most are no longer sticking to facts but are in fact cheer-leading bubbles and are fundamental propagators of speculative price movements. Caveat emptor!

Der Perfesser

You break it you own it. Who owns it?

This has raised an important, though separate question. What happens to the bank when it goes bust? (As they often do).

If a bank goes bust, and goes to the government for rescue, then the State must take over all the shares for free. The share holders are not compensated a cent. (After all, the shares are now all valueless). The government can then sell the shares at a profit at a later date when conditions improve.

The alternative, as happened with Goldman Sachs, for example of many examples, is the government lends the bank a large quantity of money, the bank recovers, and the shareholders make a motza. In most cases these banks have not repaid the money to the government.

If it is a legal requirement that the government gets all the bank's shares for free when they go belly up, it will remove the perverse incentive which now exists for the banks to take excessive risks in search of profits. If it is likely that the bank's shareholders will lose all their money, the bank's shareholders will not be happy, and share prices will fall. There will be a strong disincentive against taking excessive risks.

The government as the new owner could of course also fire all the directors and senior managers.

A corollary or continuation of this proposal is that it will lead to the very necessary separation of the commercial or lending banks and the finance or speculative banks. If the commercial banks have to 'carry' the risks of the finance banks, it will lower the share prices and the shareholders will not be happy. It is also a lot more riskier for the bank executives.

As it is said, a good policy leads to good consequences. From now on when a bank gets into trouble, if they are "too big to fail", governments should take over all the bank's shares for free. It will change conduct and performance in the banking world vastly for the better.


Ameribugger says it all. Global Banks funded by various QEs have done nothing else than store the newly printed currency in their vaults, or dished them out to banksters responsible for drowning worldwide banks and irresponsible housing speculators with currency available at 0% interest. And now they are even considering NEGATIVE interest scheme to KILL the SAVERS or turn them into CASINO-ADDICTS.


Interesting that your leader about President Obama says nothing about his decisions in the financial arena. To my mind, the biggest mistake of his presidency was his selection of Geithner as Secretary of Treasury, and the subsequent decisions not only to bail out Wall Street but to eschew any prosecution of those "too big" to fail or to jail.

TE was effusive in its praise of Geithner when he finally stepped down, which makes me think TE is also in the pocket of the global financial industry, and no longer an objective reporter on this sector of the economy.

PPP Lusofonia in reply to Rosaalba

Which is costlier in terms of economic distortion and costs to defenseless citizens and taxpayers:
A fragmented financial system with money dammed up unproductively, or an integrated financial system with money wizzing around unproductively at the speed of light?

Dr Lou

It seems rather pointless to lecture the United States on support for the FSB and 'global rules' when the European Union can't, and won't, even move seriously to a centralized European banking system.

Which European member will take a serious lead?

Germany with its pompous processes, nonreplicable economic systems and inward focused politics or France who tried to correct years and years of economic malfeasance by tapping the rich alone while refusing any realistic internal reforms?

Maybe Britain despite the recent economic nihilism presented by Cameron who is still promising the ultimate pander by holding another politically and socially flawed referendum on EU membership.

No....ok....how about Spain, Greece, Italy...?

Don't think so? Neither do I.

I support a centralized EU banking authority which would, in close coordination with the US, implement an FSB driven global banking 'baseline.'

But until the EU demonstrates a framework of its own for such financial coherence and organization, the US's 'compartmentalization' of banking systems is not an alternative and will continue.

LITM in reply to Enders Shadow

Sorry Enders Shadow, Governments offer Bond rates lower than rates provided by the free market to risk takers because the Governments are considered SAFE as investments. Municipal Bonds are additionally tax free, and see what's happening in the USA where cities are going bankrupt, unable to pay their promised interests. While I support FREEDOM in investing but likewise there has to be RESPONSIBILITY on the part of CEOs to ensure that investors are protected from FRAUD, RECKLESS SPECULATION being UNPUNISHED nor being given RETRIBUTION by the fraudsters or banksters. The free market sets the rates to pay SAVERS and INVESTORS in proportion to the risk taken. How can ANYONE justify the tax payer funded rescue of failed/failing corporations/banks? There has been no reduction in UNEMPLOYMENT despite TRILLIONS in PRINTED DOLLARS being paid the BANKSTERS who, in turn appear to have harvested ADDITIONAL BONUSES from TAXPAYER FUNDS.


A global financial market requires a powerful global financial regulator, powerful enough to force banks to behave conservatively and hold big reserves. Without one, these national rules are inevitable. Unregulated banking rewards those who take the greatest systemic risks; that can't be tolerated.

Enders Shadow in reply to LITM

Savers have no RIGHT to a positive rate of return; the fact that they have had one over the years reflects the failure of governments to control their spending to the point where government bonds - i.e. 100% safe assets - returned effectively zero. That we are no approaching that situation is - though for bad reasons - is actually progress; logically safe assets should return zero - you should only receive a return in exchange for taking a risk.


Germany should be made to face up to its responsibilities, its under capitalized banks lent billions to shaky Southern European and American entities, because they were flush with current account surplus money and badly regulated


'You break it, you own it'?
that's rather un-American when it comes to banking, if the treasury dept. 2008 bailout fund to Bank of America, Citigroup ($45 b apiece), JPMorgan Chase, Wells Fargo ($25 b apiece), Goldman sachs, Morgan Stanley ($10 b apiece),... et al was any guide.


TE writes:
Walling off banking systems will increase the costs of borrowing, especially in small or fast-growing economies that need to import capital.
We have fast-growing-economies in Europe ?

It will cut returns to savers in countries with excess saving.
Ach so ?

McKinsey, a consultancy, reckons that fragmented banking systems could trim global growth by almost 0.5 percentage points a year.
American Banks indulge in 'Carry Trade' - how does that help global growth ? Or are we to believe Mckinsey ?

Enders Shadow in reply to LITM

"There has been no reduction in UNEMPLOYMENT"
Huh? There's been a steady fall in unemployment from the peak that occurred after the collapse.

As a bank shareholder in one of the rescued banks, I can assure you that we were hit hard by their near collapse. The fact that some employees of the banks have continued to do well is indeed concerning, but the need to prevent the plumbing from being damaged did justify the bailouts.

The wider issue of 'fraud' or 'reckless speculation' is more complex. In reality capitalism is always about risk taking, and one persons 'reckless speculation' is another's 'insightful investment', depending on the outcome. 20/20 hindsight is a wonderful thing; it's easy to blame people when things go wrong - it's not always because they did anything which was illegitimate given the information that they had.

Which is NOT to suggest there weren't some very serious shenanigans: the LIBOR scandal most clearly. But to assume where there's a bad outcome, there must be someone who did wrong? That's just unhealthy.

c r williams in reply to Christopher D

You can rest easy. As well as 29 TBTF banks, nine insurance companies have been identified as systemically important and too-big-to-fail. So the mistake of ignoring AIG's woes shouldn't happen again.

That said, some finance insurance companies will fail, but they shouldn't bring down the deck of cards. Check out the comments below that apply to tbtf banks; they will also apply to tbtf insurers.


Any way to make the big banks smaller and less intertwined will make the world economy stronger and more capable of withstanding shocks.


I Agree, I used to read about those “secured” debt, and how because it was global nothing bad could happen. Time and again banks die a national death not an international one. Until there is a centralized system to look after defaulting banks there is nothing secure in the current or future system.
Imagine just a few seconds, that the system described is put into practice. The parent bank will never bail out its subsidiary as the markets will test the parent bank to the limit. And so the death of this subsidiary will be a national one with tax payer footing the bill. An even worst scenario would be the parent bank going down making things even worse.
Once again, maybe a small tax on all transactions, collected by an international institution (world bank, FMI..) that feeds a fund that is to be used for one thing only, to deal with bank defaults. That would at last protect countries and tax payers.
Thing is we have an industry that refuses to pay taxes but expects states to help them. “You break it you own it, you pay for it –ie tax payer-” should be the real title of this article.

Alan101 in reply to jgunnc

Geithner was selected by Bush (well, Paulson) and confirmed in his post by Obama. One of the many waffly decisions Obama took to bridge the gap with Republicans, who took all they could and gave nothing.

Christopher D

My coworker assures me that the problems that presaged the Famous Banking Collapse have been addressed and it is safe to invest in mutual funds again.

My favorite journal appears to agree with him. Apparently higher levels of equity, relative to unsecured debt, can prevent the systemic collapse we flirted with before. Refuting this is beyond my expertise.

I thought that a key component of the Collapse was AIG's insolvency. That is, much of this "toxic debt" that haunted Merrill and others was supposed to be insured by a collateralized debt obligation (CDO).

Once again, I am hovering near the edge of my understanding, but prior to the Collapse was this bundled debt, perhaps mortgage debt, re-classified as "secured" debt after being insured? But the insurance bookie, AIG, took too many bets on one side, lost, and did not have the bank roll to cover his bets. N'est-ce pas?

Has this problem been addressed? The problem of unsecured debt being transformed to secured debt by CDO's, which are underwritten by an unregulated market? Forgive me if I've mis-assembled the financial system. It's pretty complex.


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