New Banks for Old or ” Bring out your dead”

There is common agreement on the symptoms of the current banking crisis. The patient caught a cold, amounting to frostbite, and now the lack of circulation means that good limbs are in danger of being killed off by the struggle to preserve all. The dispute is over the treatment.

The main problem we face is the freezing of the provision of working capital due to the level of debt impairment of the existing banks.  This freezing is killing off good businesses as well as bad ones and exacerbating the crisis.

The degree of impairment is a mystery number that even the banks don’t know. The more capital that is provided to the banks the more they and their clients will be tempted to  put off the day of reckoning that requires them to recognise formally the degree of impairment. The players capacity to forestall, prevaricate and delay is enhanced by the low interest rate environment that prevails, allowing whatever cash is on hand to go further in papering over the cracks.

Quite simply, putting money into all of the old banks is putting it into a black hole that generates moral hazard at every turn as debtors will increasingly try to get the banks to suffer losses they (the debtors) dont want to face. If the old system that notionally depended on and was driven by ‘competition’ then, I must ask, where are we fostering competition or seeking to reward the best? Or is that theology dead and buried and I missed the chance to dance on its grave in a red dress by not going to the funeral….

There is not a single example of these refinancing schemes succeeding on their own to revive a banking industry. There is, furthermore, not a single example of one of these schemes working without requiring at least one further large dollop of capital as the scope for moral hazard is fully explored and the lack of candour about the current situation is revealed. Check with Mr Geithner or Mr Bernanke, if you doubt my word on this.

It is proposed, in the Irish context, to put 80 bln Euro’s of taxpayer liabilities into this fund. We should,  at least, be grateful that the sums involved are going down from the earlier enormous 450 bln guarantee. But this strategem is still anti-competitive and, worse again, putting all our eggs in the one mortally wounded and morally corrupted basket.

In order to give ourselves a fallback situation and to foster some competition amongst the blood sucking parasites, we need some new banks or banking arrangements and systems. A billion or two of the promised 80 should be sufficient to breathe life into any of the following. Especially, if we forego the traditional route of acquiring a branch network and focus on a ‘smart economy’ online structure.

There are many options:
– simple / swift

1. Renationalise and expand the Postbank.
2. Two or more new semistate banks along the lines of the old ACC/ICC.
3. Two or more new private banks with a large initial injection of capital by the Govt and a clear schedule of equity auctions that would fully privatise these corporations after say 10 yrs (this method would attract private capital and so lighten the burden on the State)

– more radical / complex

1. Separate the payments mechanism (the clearing system) from the risk taking institutions. Make the clearing system a proper ‘clearing house’, in effect, a utility that is commonly held but independent of any one institution, much like like a stock or commodity exchange/clearing house. This allows for the failure of credit institutions without seizing up the payments system. If this can be done for electricity and gas there is no reason it can’t be done for money.
2. Capping the size of credit institutions so that nobody gets ‘too big to fail’ – this will require a breakup of the existing institutions.

Any thoughts, anyone??