While I understand why have Deutsche Bank fail could be a huge issue, I also believe it's necessary to show that banks are responsible for their own bad decisions.
In at least the US and Denmark we have the concept of systemically important banks. Bank that are to big to fail. These banks will, currently always be bailed out by the tax payers. So far it seems to have worked out for the benefit of the tax payers, because the governments have managed to make money on bailing out these banks.
What I however don't understand is why governments allow "to big to fail" banks to exist. The Danish government have actively encouraged people to choose bigger banks, arguing that there are to many banks in the country. It seems like what they should do is break up banks that are large enough to harm the nations economy, should they fail.
In this case it's messy because DB problems are caused by a US government fine, a fine that realistically they wouldn't have imposed on a major US bank. So it's less about individual bank performance but rather international politics and trade barriers.
Except the fine hasn't actually been imposed. The actual fine will be about half, or less, which will be in line with expectations.
Given the ECB is more or less committed to sub-zero interest rates for the next decade, the German government bond auction very recently failed, DB's and the German financial industries' reluctance to accept what started in 2007 has ended right at their door because of their inaction, and 10 years of absurd Mercantilism that has crushed 30% of the European economy, to say this latest round of catastrophe is because of a fine is myopic in the extreme.
A fine that realistically they wouldn't have imposed on a major US bank.
Messy, indeed. But it's also a fine they wouldn't have had to worry about had their management not thumbed their noses at imposing adequate internal money laundering controls for a good chunk of a decade or so.
The US government would impose a fine, it would just be an inconsequential one. Like the one they imposed on Wells Fargo that was less than the CEO alone made partially due to the fraudulent accounts the employees set up.
"In a similar case, rival Goldman Sachs agreed in April to pay $5.06 billion to settle claims that it misled mortgage bond investors during the financial crisis." [1]
I don't know why the fine is lower, but it's the same order of magnitude...
I may be seriously out of date, but "order of magnitude" was (c.1990s, and again, pedantically) the nearest power of 10. This is the way we taught it as well (those estimation problems in the first chapter of your physics text). Conversationally it was used more with a "wild ballpark" meaning. We would say "of the order of 3000" but strictly 3000 was of the order of 1000. 5000 was of the order of 10000. Etc.
As with the east coast rail, channel tunnel and royal mail, it's likely the UK government will divest its shares just as RBS etc turn a corner and become relatively profitable (however far in the future that may be). I'm not sure if it's due to incompetence or something more sinister, and tbh I'm not sure which would be worse.
In the US at least regulators actively encouraged banks to consolidate prior to the financial crisis. Regulating a few large banks was thought to be simpler than regulating a larger number of smaller banks. Smaller banks also were typically regional which had the effect of concentrating risk. For example a crash in a commodity like oil or corn would take down many banks in a region and exacerbate the regional downturn. Larger banks had a more diversified portfolio and could better weather a regional downturn. Larger banks also reduce the risk of a run on the bank because during a run the money tends to simply slosh between large banks.
But the effect was to go from a diverse ecosystem of banks to mono-culture. Lower costs and higher productivity but more risk of losing the entire crop.
What I understood is that small banks have also smaller capitals and warranties, so in a situation where you want them to land as much money as possible to try to get out from a recession via capital investments all the small banks became pretty useless because they can't take the risk.
It seems the better solution should be to conglomerate banks in recessions to make them more stable and more capable of financing companies and borrow money, and break them as soon as the economy is stable again and risks are no more that big.
> break them as soon as the economy is stable again
How do we decide when that happens?
In a similar vein, we lower interest rates when the economy is in poor shape and raise them again when the economy is doing better. Unless the Fed can't decide that the economy is in good shape. For years.
It's not easy to draw a line and determine which banks pose systemic risk. A bank that poses no systemic risks today may do so in three years, because two of its similarly small rivals are a little weak at that time and might fall over if this particular bank does, and the loss of all three would be bad.
Difficult to judge, and the Swiss have permitted giant banks to survive with fairly small problem... I can see why regulators choose not to set a limit.
What I don't understand is why most bailouts are so gentle on the banks' shareholders. Why doesn't the state tell each shareholder "you may provide money to help save the bank or let go of your shares, your choice, please decide by the end of next week"?
I second OP. Broadly I think the EU project are pushing back on the economy over politics paradigm given the general and endemic failure of credit cycle economics and the Brexit and migration meddley.
To your second point OP, over banking is a problem. If means more expensive banking operations which effects the whole of industry . Banking monopolies are the best of a set of bad options.
Regarding the second point, can you give an explanation of why you think that is the case? Normally more competition leads to lower prices. Why should banking be special?
Because of the effect of aggregation on the price of transactions and operating profit. Have a read through the rationale for these merger ideas here to understand more :
When banks are held responsible its the people who end up losing money.
You can't just let them be when they struggle because you'll end up paying double.
It doesn't mean that banks don't end up "paying" especially if there was misconduct but it's not as simple as just giving them a cold shoulder.
"When banks are held responsible its the people who end up losing money."
If a bank is insolvent, as it looks like Deutsche Bank is, you've _already_ lost your money.
"You can't just let them be when they struggle because you'll end up paying double."
Bailing them out means paying double if they lose your money making stupid loans or ridiculous bets and then they get bailed out with taxpayers' money. They were already in deep trouble eight years ago and were bailed out. What did they do with that lifeline? Placed even more ridiculous bets with it, bringing in the bonuses but expanding the bank's debt to a whopping $42 trillion.
Besides, banks aren't special. They're businesses like any other. They need to go bankrupt if they make stupid business decisions.
"It doesn't mean that banks don't end up "paying" especially if there was misconduct but it's not as simple as just giving them a cold shoulder."
No of Wall Street executives prosecuted for the financial crisis of 2008: 0.
> Besides, banks aren't special. They're businesses like any other. They need to go bankrupt if they make stupid business decisions.
I disagree. Banks form the foundation of the infrastructure of the capitalist system. Failure of banks has a large effect on the businesses that rely on that system to operate.
Yes it is. Capitalism doesn't mean an absence of government or make any distinction between private or public ownership, it simply means that the way resources are distributed is through a market system. In order for the market to operate a means of exchange that we all agree upon and trust is required. This is money. Banks manage the market system's means of exchange. If something happens that impedes the exchange, the system is compromised.
capitalism: an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.
That's the dictionary definition. What you're talking about is "the free market" - which is not the same thing as capitalism.
If we are nit picking...
What I am talking about is free market capitalism. The definition you quote talks about trade and industry - which we can reduce down to calling the means of production. Capitalism is about ownership of the means of production for private gain. It doesn't exclude government ownership of resources / means of production or indeed and perhaps most importantly the money system. I think you could even argue that public ownership of the money system facilitates the capitalist economy. What does the central bank / federal reserve do?
That still doesn't make them special. The failure of any essential service provider or business partner can have a crippling effect on a business. That's just a risk you take precautions against as part of normal day to day operations.
Treating them as the foundation of the infrastructure of the capitalist system and therefore somehow exempt from regulation, the law and the market is why the global economy is in such a mess today. There are no consequences any more to bad decisions by the global banks. They keep getting bailed out and bailed out and into more and more debt. One day the can will no longer be able to be kicked down the road.
There is lost your money, and there is lost your money.
Technically once you gave money to the bank you've lost it, what you've gained is a body that would tell other people on your behalf "it's ok i got him covered".
Once you can't use an ATM, can't pay bills with direct debit, can't do anything then you've effectively lost your money.
The problem is that DB is a commercial high street bank, and not only that it's one of the biggest banks in the world and across Europe.
Please save us the sentiment which is actually likely to be out of place here because people have somewhat incorrect analogy to wall street and 2008 and say the banks are guilty, their employees/managers are criminally negligent and they should be put on trial.
DB isn't LB on many levels, it's haunted by it's ghosts, but what plagues it and every other major European bank is not the same, and in this case they aren't the only body at fault, the policies of the ECB and the local central banks in Europe so far were pretty devastating for the banks.
As a simple customer of the bank, your money there is ensured up to €100k. If you own stocks, you own them in full you can move them away without issues.
So, I would say, for most people in a country, if a single bank fails, you have nothing to worry.
If many banks fail, this is another story as they insurance pool of the banks may dry out.
Insurance takes time to claim, when banks fail the financial services stop functioning, when your payments don't clear you are at considerably greater risk than when a bank is insolvent and can't consolidate it's outstanding accounts with the central or its peering banks.
Commerzbank is in almost of a bad shape as DB, same goes for many other banks in the EU and Germany.
Greece was a nightmare people don't really understand what was going on and the fact that they couldn't use an ATM, couldn't pay their bills, but at least that was a country wide issue.
When you get a similar situation but when one out of X people is left hanging in the wind because their bank has failed it would be considerably worse since there would not be a single unified emergency solution to cover them (in greece people stuck it out, there was even bartering, local stores had credit ledgers etc, GL getting credit from your local supermarket because your DB debit card won't work anymore), and when more banks start to fail because their investors and creditors lose faith and pull out (which is what happened to LB) it would make things worse and worse.
It's less than 20 days by law in my country and almost everything is done without depositor's input -- money are transferred to another bank and you simply come there with your ID to take your money in cash or open an account in another bank. I really wouldn't mind to wait a week or two as opposed to billions paid of tax money.
You might not really mind for a week or two. Businesses and people relying on payroll being hit on time certainly do mind, and the longer it gets backed up the greater systemic effects it can have.
As someone living in a country where one of the biggest banks was robbed to fund hostile takeovers and media propaganda for many years (€3Bn spent on that), I can assure you that the law means jack shit.
During last 5 years 2 banks have went bankrupt in my country (Lithuania), so I can assure that this insurance works really well here, everything went orderly and individual depositors received their money promptly (in about a week if I remember correctly).
Lithuania nationalized the shares of it's failing banks, which was in effect a bailout.
When Snoras failed your government bought out 100% of it's shares and facilitate the recovery of the deposits.
So this isn't a case where a government let a bank fail, this is the traditional bailout mechanism for failed banks - the government buys them out.
This is what Latvia did with Parex, what the Netherlands did with SNS and Fortis, what portugal did with BPN and the list goes on and on and on.
For the most part no one let a bank fail the same way that the US did with LB, and no one would really want to try that with a commercial high street bank.
When banks are held responsible its the people who end up losing money.
"When banks knowingly engage in irresponsible, or in Deutsche's case, criminal behavior it's people who end up losing money" is the spin I would put on it.
I'm all for wiping out bank shareholders to zero and sending corrupt executives to jail... but if the financial system and the public lose confidence in Deutsche Bank, one of the world's largest banks, we could end up with another global financial panic like the one we saw in 2008.
The world cannot afford to have another global financial panic. The outcome could be catastrophic. Lenders, including depositors like your Aunt Tilly and Jack the plumber, should not have to worry about the safety and liquidity of their money.
The financial system is infrastructure -- like the electricity grid and the Internet. We cannot afford to have this infrastructure come to a halt due to the fear or stupidity of greedy executives. Businesses and consumers depend on this infrastructure every day.
Amen. Bringing accountability in the banking sector? That's a refreshing thought and a decisive step forward to save, whatever can be saved from the EU.
AFAIK, in case of criminal charges, the bank license could be revoked as consequence; that would match the fact that [AFAIR] there are often N zillions of dollars in fines, but never charges against the executives.
It's not enough to jail executives. It's also important that all institutional lenders (money market funds etc) that has financed the bank (in addition to all equity holders) take a hit.
The obvious way to wipe out both shareholders and keep the bank functioning is to supply capital to the bank, but take ownership in return. As the bank is worth less than 0 before the bailout (or one wouldn't be necessary) it would be a total wipeout of shareholders.
>The financial system is infrastructure -- like the electricity grid and the Internet.
The key difference being that the financial system is a purely informational form of infrastructure. Where as the electricity grid and Internet are physical, real forms of infrastructure.
Information is far more easily recuperated (thanks to the internet/electricity grid) when a crisis occurs (i.e. a "bubble") than when a crisis occurs to physical infrastructure like the internet or electricity grid (i.e. an EMP).
On the other hand, physical infrastructure failures are pretty much always local - you can lose the grid in a city, state, or even whole country and, while bad, the negative consequences will be contained and limited - neighbouring cities/states/countries will jump in and help. A cascading problem in the global financial system could make half of the western world go hungry, or even start another major conflict.
This might be a silly question, but as a customer of Deutsche Bank what would the likely outcome be to your money and account if the bank is allowed to fail? Is it just that another bank takes over the account?
On default your savings are insured up to 100.000 Euro. https://en.wikipedia.org/wiki/Deposit_insurance#European_Uni... The security measure only really works if one bank fails, not if suddenly many fail. You probably won't have access to your money for months.
You don't want to get all sweaty when the news starts coming in about the final death throes. Even if there's a guarantee (and there are in many countries), I would imagine there would be a period of limbo where it's very hard to get a hold of people who can assure you.
Meanwhile, there's plenty of other banks who seem a lot less likely to fail.
And that's how business works. Sucks for Deutschne, but I wouldn't want to have my money reliant on a system that needs a bailout. If they can't do business right, they need to fail.
Sure, but isn't that also the mechanism that can lead to the next bank collapsing, and then the next... Like with bubbles, individually beneficial action will result in doom if done by everyone at the same time.
Yep. So if they do, you want to be early. If it's just cash, it's pretty damned easy to just go into your online banking and send it to another account.
If you have an account with a US branch and the amounts are under the FDIC insurance limit the process of transitioning people's accounts from the failing bank to a new bank is usually pretty efficient. It seems to happen overnight in most cases. Failed banks are much more common than people realize but they are usually smaller and don't have national or international presence so you don't hear about them as much.
Historically in the 20th century, it is not that common for a bank to fail. Since 2008 bank failures have accelerated greatly.
I also could tell a story about people losing access to their money for weeks, waiting on the FDIC, when IndyMac failed at the start of the recession. But it is not my story to tell as it did not affect me, and it was also one of the largest bank failures in US history, at a time when the FDIC was already undergoing stress, so I doubt it was malice.
I just wouldn't count on FDIC insurance to save you in the short-term if shit starts to hit the fan. Have a cash reserve.
The first major cluster of failures actually preceded a crisis(the S&L crisis) and fell off rapidly after, whereas in 2008 the cluster was timed with the recession and had a longer tail of failures afterwards that continues to this day.
Wherever you want. I'd recommend a firesafe bolted to your foundation slab, but that's just me. I'm not saying to keep a lot your short-term reserves in cash, or even necessarily more than just enough to buy yourself food for a day or two, but you also shouldn't rely on always being able to get money out of an ATM or that the global payment remittance systems will work in a true emergency, either.
What I find interesting is that you lose all money over the insurance amount, but you're guaranteed that someone will buy up any debt you may have, regardless of the amount. While I understand why that is, it hardly seems fair that the customers can only lose money.
All banks in EU are insured, but the max amount and percentage varies. The amount/percentage for Germany is 100% of up to EUR 100.000, according to Wikipedia.
The challenge in 2008 with the Lehman collapse and AIG's later struggles is that there was no method to wind down non-bank financial institutions except through the bankruptcy courts.
After the financial crisis regulators were given authority to take over non-bank financial institutions and also created the concept of bail-in where a large bank or financial institution that was in financial trouble could raise equity over night through forced conversion of some of its bonds to equity. This would of course dilute existing shareholders and result in potential losses for bond holders but the bank continues to function which removes the systematic risk. As part of the reform the banks were also required to hold more liquid capital to reduce the risk of runs and to go through stress tests to validate that bail-in capital was adequate.
The politics are that in Italy the banks bonds that would be subject to bail-in are held mostly be retail investors (granny and grandpa) and a bail in would be politically costly and they want to bailout banks using tax-payer funds.
At the end of the day losses due to bad loans have to be allocated. Those losses can be allocated to bank equity and bond holders through bail-in; depositors through bail-in or lower interest rates; tax holders through bail-outs; or to savers through Central Bank inflation and fiscal stimulus. Each one of those scenarios creates winners and losers with vested interests. There is also strong cultural memory with Germany looking back to the hyperinflation of the 30's that gave rise to the Nazi Party and the US looking back to the 30's and the Great Depression when losses were allocated to banks and depositors.
The alternative is extend and pretend which is to ignore bad debt and because in the future "we're all dead." This was used in Japan after its financial crisis and creates and interlocking group of zombie companies and banks which seem to feed on the rising generation.
It is important to remember that the reason many countries are out our cash/ deep in debt is because so much money has been spent on bailing out banks. E.g. in the UK, this was more than a trillion pounds at the peak of the crisis.
Please explain, or link to an article that you believe show the more accurate story.
For all I know: Iceland let its banks fail and jailed some high-ups in said banks, while bankers worldwide said Iceland was going to have an endless recession because of it, which did not happen.
Icelandic banks were in the business of promising huge returns to foreigners. When those banks failed, the hardest hit were people who didn't live or vote in Iceland. It's pretty much a no brainer that Iceland isn't going to do squat to help them.
Don't know what the original commenter had in mind, but the vague, popular impression seems to be, in so many words:
"The brave people of Iceland decided they had enough, and formed a lynch mob and put a few dozen perpetrators in a real, actual jail. Which didn't reverse the damage caused, by any stretch, but at least they got sliver of self respect back after being taken for a ride by these assholes."
Not sure how accurate that is, but any qualification (or just any articles at all you feel give a more grounded summary of events) would be very helpful.
Germany, imho, is doing whatever it can to avoid to put money in a failing institution because they promoted so much the "be responsible, no buyouts" in the whole EU area. Now that they are in trouble if they go for a buyout there will be _a_lot_ of states who will ask to definitely stop all the austerity measures they so hard promoted [and that, honestly, never worked for any south-west country in EU, they just worsen the situation].
No. That was the case for Greeks and PIIGS in general.
The Greek bailout, was an indirect bailout of Franco-German banks[1]. Ms Merkel was not able to ask for a second bailout, so she masked the bailout as a solidarity towards Greeks.
Of course Greece's public debt sky-rocketed (from 120% of the GDP to 180% in 6 years) but the worst part was the total disintegration of the Greek economy. Since, throwing money in failed banks never works, we're back in square one. Oh, in the process she also destroyed the Eurozone, but that's just a side effect.
Exactly this. We already saved DB in 2010, and by we, I mean, southern Europe and Irish taxpayers. It's well documented that the bulk of the debt contracted by southern European and Irish governments ended up mainly in DB and to a lesser part in the Bank of Scotland backed by the money of German taxpayers.
It's no wonder that Schauble was pressing so hard 2 years ago for a big part of Greek Assets to be held abroad as guarantee the debt payments would be made... where? In DB non the less.
> The Greek bailout, was an indirect bailout of Franco-German banks
It truely was. German banks (and DB) was main creditors and could not afford Greece to default.
They borrowed low interest money at ECB (0.5-2%), spend it on high paying greek bonds with interest between 10-15% - but could not deal with the risk...
It will not be allowed to fail. Period. It would send EU and probably the world into yet another financial crisis.
They're likely to keep it floating, take control of it, and demand that it is split into smaller pieces. Anything else would be completely irresponsible, especially if it's because of pride.
>>> This is especially important now when countries like Poland have the Euro hanging over their heads.
Not sure what outlets you are using for getting your information, but there is no way Poland will implement Euro within next decade unless something catastrophic will happen to their own currency. The referendum won't go through and if the government will try to pass it without public approval you will see hundreds of thousands of people taking this to the streets. The western media do not understand the situation in central Europe. While Poland still being one of the biggest EU supporters, is actually supporting a conservative model of it, without any deeper integration when possible. Status Quo from 2010-2012 is what Poland wants to maintain its relationships with EU and only change they are looking for is a bigger influence in central Europe and EU offices.
> While Germany might not step up now, the ECB will not let DB fail [...]
I think that the main reason this can't be, is because of the Maastricht rules effectively blocked the creation of a proper banking union. Mario Monti, when he was Italian PM along with and Mario Draghi, tried to create a proper banking union, but Scheuble under the instructions of the Bundesbank blocked the procedure. Ironic isn't it?
Of course since Germany at this point could have the cake and eat it by bending the rules, but that wasn't the case for Italy 2 years ago.
We'll see. However, I believe that given the current state of disintegration in the EU it's politically toxic to issue another bailout to a major European bank while unemployment is in record-highs all over the European north and the south.
Different from 2008, we now know the ramifications of a failing bank pretty well. The EU is conducting yearly stress tests to that effect. [1]
We now see the effect of this new knowledge about a previously opaque sector. Politicians and buraucrats are not as afraid any more. So banks cannot get away by having the tax-payer carry their risk.
You should read the results of the stress test, also a hint it wasn't about "can the EU deal with one of the world's largest banks collapsing" but what can be done to prevent collapse, and what is the overall risk.
http://www.eba.europa.eu/documents/10180/1532819/2016-EU-wid...
DB is also not lehman brothers, so the 2008 analogy isn't exactly on the money.
Says who? - "a senior lawmaker in Chancellor Angela Merkel’s conservative bloc". Germany will do what it has to do to keep its economy afloat. If they have to bail out their banks, my bet is they will.
Its worth pointing out banks in the EU haven't yet deleveraged like the banks in the UK and US. Deutsche bank falls under this list of being too leveraged.
The only meaning of such a statement is to say that DB is in deep trouble.
It's just like when there's a big company meeting and the boss tells everyone you're going through hard times but everyone's job is safe. Or that the last round of redundancies was the final one.
Whether the government does bail them out can only be tested in one way.
In at least the US and Denmark we have the concept of systemically important banks. Bank that are to big to fail. These banks will, currently always be bailed out by the tax payers. So far it seems to have worked out for the benefit of the tax payers, because the governments have managed to make money on bailing out these banks.
What I however don't understand is why governments allow "to big to fail" banks to exist. The Danish government have actively encouraged people to choose bigger banks, arguing that there are to many banks in the country. It seems like what they should do is break up banks that are large enough to harm the nations economy, should they fail.