CHART 1: BANKS ASSETS – COUNTRY GDP
Source: Capital IQ, CIA Factbook
every generation. In a majority of cases, the badbanks were allowed to fail and newer, strongerbanks took their place. However, the recent modusoperandi of the central banks and policy makersallowed over-levered banks to get even bigger,rewarded risk taking with bailouts and let theinherent problem of unsustainability fester.We carried out the exercise of taking the largestbanks, or in other words, the “too big to fail” banksin the G7 countries and added up their assets inrelation to the host country GDP. For the layperson,a typical bank’s assets are primarily composed ofthe loans they have originated while the liabilitiesare primarily composed of deposits they haveaccepted. With the exception of the US, all G7countries have banking systems that have becomelarger and in some cases dwarfed their respectiveeconomies.
How does the new template affect you?
This “template” is already being applied to the“too big to bail” banks in other developed countriesaround the world. A statement in the joint paperpublished by the FDIC and the Bank of Englandin December 2012 reads:
“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt fromthe original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed
operating entities. In the U.K., the same approach
could be used, or the equity could be used to recapitalize the failing financial company itself—
thus, the highest layer of surviving bailed- in creditors would become the owners of the
resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.
Note the lack of the phrase “uninsured depositors”in this context, which opens the doors for bothinsured and uninsured depositors to be affected.In a similar vein, Canada’s recently released budgetaddresses the same problem. Page 144 of Canada’sEconomic Action Plan 2013 reads:
“The Government proposes to implement a – bail-in regime for systemically important banks.This regime will be designed to ensure that,in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through
the very rapid conversion of certain bank liabilities
into regulatory capital. This will reduce risks for taxpayers.”
Likewise, New Zealand’s Open Bank Resolutionpolicy allows for a “bail in” of afflicted banksby wiping out the equity holders first, the bondholders second and finally forcing a haircut onthe depositors.
Over-levered banks are not a recent development.We are faced with a banking crisis, seemingly onceGovernments around the world are finally beginningto realize the gravity of the risk that exists in theirbanking sectors. The EU has decided to build uponthe new template of the “bail-in” regime. The US,UK and Canada have all followed suit. This puts theonus squarely upon the depositor. The depositor is alender to the financial institution that he banks with.