Wednesday, October 05, 2011

Bank Recapitalisation ... Pirate Style

After much ado, the European Union seems to have been badgered into emergency action in order to re-capitalise the banking system due to its over exposure to instruments based on sovereign debt and the reliance on the dollar. I'm not a fan of this, this is just another monetarists prayer to the altar of "no sodding evidence whatsoever" and as usual the taxpayer will foot the bill.

Naturally, there will be wormtongues who will claim it was a Keynesian approach when it all goes spectacular wrong ... that is par for the course for economic banter.

So given that we're going to re-capitalise the banks, let us at least try and arrange the situation in the interest of the taxpayer. First, re-capitalisation should be forced and not voluntary and the capital ratio set by Basel should be raised to 30%. Next the banks should be given two options - either raise the money yourself or borrow from us, the nice friendly EU.

Of course, being the lender of last resort, there will be a couple of strings attached to the capital we lend (oh and lend is the operative word). Hence :-

  1. The entire capital lent will need to be repaid annually over 5 yrs at EU base interest rates or average EU inflation (whichever is higher) + 10%.
  2. The EU takes precedence over all other debtors and the entire banks assets will be used to underwrite the loan
  3. A sum of Bank equity equal to capital lent will be paid to EU as our "setting up administration fee"
  4. Late payment will incur an APR of 200% plus a penalty of 50% on any remaining capital.
  5. No dividends will be paid until the entire loan is repaid
  6. Upon final repayment of the loan, another sum of Bank equity equal to the capital + interest + any late payment fees will be paid over to the EU as our "closing administration free"
  7. If you don't like the terms then go raise the capital yourself on the open market.

Now, I'm not actually advocating such draconian terms but I'm arguing for the EU and our Gov to stop acting like they're just pawns in this global game and start acting like pirates. The banking system is an essential vehicle for our economic system but like all things, it should be managed in the wider interest of society.


Dave Neary said...

Won't you end up in a high stakes game of Chicken with governments who stand to lose if the banks go broke (thanks to guaranteeing deposits)?

"You can't let us go bust"..."Oh yes we can"...

andyjpb said...

Recapitalization of the banks should definitely represent a sensible investment for the taxpayer.
Just look at the state, for example, Lloyds is in in the UK at the moment. The share price is well below what the taxpayer paid and shows no signs of rising any time soon.

swardley said...

+Dave Neary: Possible, though UK FSA only guarantees upto a certain level of deposit and in the above case we're talking about a loan.

However, as for Chicken - a high stakes game designed to influence the government for the purpose of advancing a monetarist ideology which may involve serious damage to the property and assets of UK citizens - well, there's always the Terrorism Act 2004.

Governments have a range of very sharp teeth which banks don't. Threatening we will go bust and bring down your economy if we don't get our way, might end up with some very interesting consequences. I'm not sure the wise would want to push that one too far.

Contrary to popular belief, it's not Goldman Sach's that rules the world, Governments do (albeit probably under heavily influence and infiltration).

rain said...

They need to slow down when it comes to deciding on these matters. Emergency decisions will only fail the financial scheme.

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