BOE Hints of Breaking up Banks with over $100B in Assets

BOE Hints of Breaking up Banks with over $100B in Assets
stux / Pixabay

This is hardly news, as ValueWalk readers had the outline already on June 8th 2012.

The gentlemen of the press do have a weird sense of what is news – they more or less concentrate on what has happened. To them King Ganute is still washing his feet at the seaside.

BOE Hints of Breaking up Banks with over $100B in Assets

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But now – finally – reality is catching up to the Telegraph. CEO of Bank of England Andrew Haldane:

Interestingly enough we for the first time get at ballpark figure as to how big is too big:

He added that the evidence pointed to the optimal size for a bank is under $100bn (£62bn). However, the “big banks are even bigger” than before the crisis, he noted.  Barclays PLC (NYSE:BCS) (LON:BCS)’ balance sheet is £1.5 trillion, Royal Bank of Scotland Group plc (LON:RBS) (NYSE:RBS)’s £1.37 trillion, and Lloyds Banking Group PLC (ADR) (NYSE:LYG)’s £930bn.

Below is a list of banks which definitely are in for it:

I have droned on and on about Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) with a balance of 3-400 billion USD is definitely on the death list and Nordea in Denmark alone is 100 bio. USD.


Without the subsidy, “there is no longer evidence of economies of scale at bank sizes above $100bn. If anything, there is now evidence of dis-economies which rise with bank size, consistent with big banks becoming ‘too big to manage’,” he said.

“Subtracting this subsidy, removing the state crutch, would suggest a dramatically lower socially-optimal banking scale. Like King Kong and Godzilla, these giants would arguably then be physiological impossibilities … the weight transfer associated with a single step would have shattered their thigh bones.”

That is the first time I’ve seen the argument that precisely the very size of the bank is endangering its very existence. I’ve heard and forwarded the idea, that if we don’t break up banks we will not have state owned banks, but bank owned states. Andrew Haldane is much more specific in pointing out, that a bank – beyond a certain size doesn’t know what it is doing.

He has a definite point: When Lehman Brothers collapsed Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) was at first relaxed, as they had insured against that possibility – the only problem was that the losses had such size that the insurer went bankrupt.

There is a lesson in that: Up to now the American banks have been bailed out with QE; but somewhere along the line that must stop, as banks run at a loss – not even considering the losses on bad debt. When sovereign bonds carry no interest – and that state money transfusion stops – there is very few to lend money at an interest rate that eventually carry a profit: All the risky loans where good management could earn a profit to the bank are already in distress and are as such not paying any interest.

How are they going about it?

Well there appears to be more way – depending on each country.

To address properly the “too-big-to-fail” problem, he said regulators should consider doubling banks’ loss-absorbing capital buffers to around 20pc, “placing limits on bank size”, or imposing a “full separation of investment and commercial banking” rather than a ring-fence.

There is no way that amount of capital can be raised. We could dispel the ever flourishing fear and often conjured fear of a Chinese take over. China indubitably has the money, but I have the hunch that they might lose the inclination – once they discover the vast losses stored away on obscure accounts – which they might be told in every confidence. Besides, China has banking problems of own their own brands.

The idea of raising new capital is definitely copied from Basel III, but other countries have different problems.

To return to the “shire”, Denmark, where all the banks have a total balance amounting to – let’s be generous – ½ trillion USD there is in addition to that an almost similar balance in real estate mortgages (maybe 1/3 trillion USD). It appears that the mortgage banking industry is the highest priority for the CB, the government and the opposition. Though what the government thinks is shrouded in internal infighting – but minister for Economics, Margrethe Vestager has stated that real estate prices “have stabilised” (keeping a solemn face without bursting into tears). This would indicate the order of priority also because the new banking minister is a new Socialist Left schoolteacher which was subject to a full two day intensive instruction in the government’s policies – she does not have a clue.

Sweden is in a different position where the banks never really got out of the nationalisation necessary when the Soviet Union broke down. The bluff about the ability to make real money in Sweden was called at that time as the Wallenbergs disappeared into obscurity. Sweden has been living on their old metal working reputation and cheap hydro electric power, but that is water under the bridge. The real problem however is that the large Swedish banks are hugely involved in other EU countries Euro-zone or not. Not only is Nordea 1/5 to ¼ of Danish banking, but Swedish banks are a much larger proportion of Finnish banking. There is a huge disentanglement operation waiting there.

Germany has Deutsche Bank AG (NYSE:DB) – and to some extend Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK)–  and others in the dustbin (Hypo Real Estate I seem to remember) to deal with. But the key to understand German financial policies is to note that Ludwig Erhard in 1948 “slimmed” bank balances by introducing the Deutsche mark – he simply chopped 90% of the deposits. The government is a conservative/liberal one; but no doubt the German banks would rather like a socialist – they are liable to be less cruel. Anyway the infrastructural investments needed are so large that they will have to be publicly funded anyway. Business credits are likely to be small. One possible solution would be advance payments to the large contractors which again advance suppliers – so what size of finance sector does Germany need?

Spain: Well, the major banks are likely to remain just where they are – being slimmed the moment they hint a profit. Italy already has a much more fragmented banking sector.

The real odd man out is Switzerland. Something is going on, but it what exactly is hard to tell!

I referred on August 8th to the interview with the chairman of UBS AG (NYSE:UBS):

The mere fact that UBS CEO is a former Bundesbank CEO should make pause. There has been much publicised talk about hamstringing – primarily German – tax evaders where pot-bellied German tax inspectors have pulled a few James Bond stunts with stolen Swiss bank computer disks. Indubitably the Swiss banks have been under German investigation for quite some time – in connection with the LIBOR scandal. The brake seem to be the translation programmes for emails need to be programmed as they were in French and neither English or German.

As to UBS AG (NYSE:UBS), JyllandsPosten has:

Several thousand employees could lose their job in the Swiss bank UBS

The quarterly report published next week from the major Swiss bank UBS AG (NYSE:UBS) could be very sad reading for up to 10.000 employed in the bank.

According to several media the bank will simultaneously publish that many employees are to be sacked in the coming years.

A year ago the bank announced that 3500 employees were to be fired to save a largish billion EUR amount. The new round of redundancies will cut substantially into the staff that at the moment numbers around 60.000.

New strategy

Many banks fight with falling profits and must simultaneously comply with increased demands for capital by the authorities.

The expected dismissals in UBS must be seen in this light; but they are also a part of management strategy changed as an employee has been indicted for fraud in the billions.

UBS risked at one point losing 12 bio. USD on unauthorised deals by employees; but according to the indictment ended costing UBS 2.3 bio. USD.

The Guardian
is the source:

But add. Quote:

Sergio Ermotti, the new chief executive, is also said to have been under pressure form Swiss regulators to reduce the risks being taken by the bank.


He is reported to be planning on splitting the investment bank into a non-core division – headed by Carsten Kengeter, who currently runs investment banking – and a continuing investment bank comprised of equities and corporate finance among other activities.

That is pretty much the British model.

I don’t know what kind of leverage Germany has on Switzerland and its bank; but it must be substantial.

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