Frankfurter Allgemeine Zeitung has:
“The UK and American controlling authorities have presented a common concept four years after the collapse of Lehman Brothers Holdings Inc. (PINK:LEHMQ) as to how to prevent a future uncontained collapse of an international major bank.
The strategy points, among other things, to the healthy parts being allowed to continue and the weaker parts can be broken up, sold, or dissolved – without the taxpayer eventually becoming liable. The Euro-zone should develop a similar concept within the planned Bank Union.”
The Federal Deposit Insurance Corporation (FIDC – works as a bank inspection) and Bank of England have issued a common paper that addresses the problem of the Lehman Brothers Holdings Inc. (PINK:LEHMQ) failure when the market expected the saving of Lehman Brothers, which did not happen, precipitating the worst banking crisis since WW2 – leading to tax payer liability to save countless banks.
FDIC and BoE’s plan determines that one – and only one – bank inspection authority should be in charge in when a major international bank is broken up.
The American authorities have, since the March 2010 Dodds-Frank Act, sufficient power for that purpose. The British has them as well since the 2009 bank law took effect.
It is vital that international and systemic relevant major banks in the future have so much equity and junior debt that can be turned into equity in an emergency, so the shareholders and some of the creditors can absorb the banks' losses. The continuing business should then be sold off to another private institution.
“The corporation should have so much capital that it can be saved without neither tax-money nor insolvency. The foreign branches should be fenced off so they can continue in line with the healthy domestic parts. The common British and US strategy contains that the bad part of the bank should be diminished, dissolved, broken up, or sold. The common plan of the British and Americans anticipates that the management responsible for the disaster should be substituted.”
1) This has been coming for quite some time as the dates point out. Judging from the behavioral pattern in the EU, it is highly unlikely that a similar arrangement will not be implemented in – at least - the Euro-zone. I’ve tried to imply as much in the treatment of the Nordea Bank AB (STO:NDA-SEK) reactions in the SAS debacle – the latest one that is.
2) This will mean the end to international banking as we know it. In order to ensure that each national (or currency) unit has sufficient equity to remain viable enough to survive a collapse of the other it will mean that cross-holding must be prohibited or the collapse of one unit will inevitably incur considerable losses to the other(s). Put it another way: Ownership of banks cannot cross currencies.
3) If implemented, it will mean a very uneconomical use of risk-willing capital, as each sub-unit must be able to cover a worst case scenario independent of aid from the “mother”. This will in itself limit the size of the bank within each currency. There will be a violent inducement to reduce size to non-systemically-important.
4) We are talking massive capital requirements for bank recapitalization, as every bank subsidiary must be recapitalized in its own right. One thing is the question of nationality and/or currency, another is the simultaneous split into retail-banking, investment banking, mortgage banking, pension saving etc. – each subdivision must be fully capitalized or the whole reform leads absolutely nowhere.
5) This takes us on as to how that amount of capital can be raised. Not that there is a lack of capital – on the contrary, with sovereign bonds tormented with 1% interest for 10 year maturity – but how that capital is to be led to the recapitalized banks remains a moot question. The very act of buying bank shares by a pension fund or insurance company would entail the conflict of interest the plan is intending to avoid.
6) I can only see one source of capital in that order of magnitude (considering the very low capitalization of banks if their books were audited without blinkers) – national governments. This may very well be the intention, as the prospect of a bank owned state is more distasteful to parliamentary politicians in Europe and presidential officers in the USA than the frank admittance of nationalized banks.
7) The next question is how the states are going to raise that capital? The face of the taxpayer is haggard enough as it is, so new sheep will have to be recruited to the ranks: The taxing of the pension funds – so the pension fund will only pay out taxed allowances to the beneficiaries when that time comes. This might not even be a disadvantage, as that would reduce the amount of capital in the pension funds to the extent that pension funds are in reality investing deferred taxes. This will indeed give a shortage of capital that will raise interest rates – and yields – as only economically sound propositions that can pay their way can be funded. But that again is a long way off.
8) The major short term problem will be how to prevent a panicked sell off of bank shares once the investors get a notion of what the major political forces are up to.