We Are Being Drip Fed What They Think We Deserve To Hear
Oct 20, 2015 19:30:19 GMT 10
Frank likes this
Post by Matilda on Oct 20, 2015 19:30:19 GMT 10
Bank Capital Is An Illusion
The Murray Financial System Inquiry recommended raising bank capital in order to “reduce the probability of failure”. (As Turnbull said - from a global financial collapse but media fail to mention).
But does capital actually do that? It may be used to protect depositors from loss once a bank has failed, but if real estate prices collapsed would the existence of 8 per cent of risk-weighted capital stop a bank from failing?
And would Westpac or one of the other big banks be allowed to fail anyway? Hardly: they are way too big to fail.
Imagine the scene outside a bank, after Australia’s property market has collapsed. “Wait,” goes the murmur down the line of depositors anxiously snaking up the street outside the banks’ doors. “It’s OK! The bank has 8 per cent risk-weighted capital. We’ll be fine.”
I don’t think so. The only thing that stops a run is a prime minister with a megaphone.
That’s what happened when Kevin Rudd guaranteed all deposits and wholesale term funding of all banks on October 12, 2008. It was the most effective megaphone in the history of banking — taxpayers stood behind every deposit. End of problem.
The Government still guarantees deposits up to $250,000.
So the question is this: if an Australian bank was on the brink of insolvency, and about to fail, would the Government really say: “OK, we’ll repay the deposits up to $250,000 but everyone else has to look to the capital. Sorry”?
Or would another press release come from the PM’s office like the one on October 12, 2008, upping the guarantee to include everything? I rather think it would be the latter.
It’s remotely possible that a smaller bank or credit union would be allowed to fail, so that the liquidator would have to call on shareholders’ money before selling or collecting on the assets, but it would definitely not happen with the big four. They were too big to fail in 2008, and they’re even bigger now.
In which case, in the real world, as opposed to the theoretical world of banking inquiries, capital is irrelevant.
It is too small to prevent a run, and anyway no government could risk letting it happen to a systemically important bank and would act first, and in any actual liquidation the capital would be gone in a trice once the liquidator started selling loans for cents in the dollar, and depositors would still lose plenty.
That’s especially true in the world of risk-weighted capital, where only 16 per cent, rising to 25 per cent, of real estate mortgages count against capital. That means the value of those mortgages only need to fall by about 2 per cent to chew through the capital.
So what is bank capital really for? Two things:
1. To provide the illusion of strength. Murray said Australia’s banks need to be in the “top quartile of internationally active banks when it comes to capital strength”. Really? Who says? And why quartile? Why not decile? Hell, why not be the banks with the most capital in the world?
2. To ‘tax’ shareholders and depositors for the government guarantee. The Abbott Government proposed an actual deposit levy but that was blocked by the Senate. Maybe Malcolm Turnbull will back his ability to negotiate one through, but in the meantime, increasing the capital requirement is a way of achieving the same thing. So far Westpac has announced that the tax is 20 basis points on deposits. The problem is that the Government doesn’t collect that money.
The argument between regulators and banks over capital is really an argument about taxation.
The truth is that big banks could have no capital at all because they are too big to fail, still.
This from The Australian 20/10/2015 by Alan Kohler
www.theaustralian.com.au/business/opinion/bank-capital-is-an-illusion/story-fnp85lcq-1227575122314
The Murray Financial System Inquiry recommended raising bank capital in order to “reduce the probability of failure”. (As Turnbull said - from a global financial collapse but media fail to mention).
But does capital actually do that? It may be used to protect depositors from loss once a bank has failed, but if real estate prices collapsed would the existence of 8 per cent of risk-weighted capital stop a bank from failing?
And would Westpac or one of the other big banks be allowed to fail anyway? Hardly: they are way too big to fail.
Imagine the scene outside a bank, after Australia’s property market has collapsed. “Wait,” goes the murmur down the line of depositors anxiously snaking up the street outside the banks’ doors. “It’s OK! The bank has 8 per cent risk-weighted capital. We’ll be fine.”
I don’t think so. The only thing that stops a run is a prime minister with a megaphone.
That’s what happened when Kevin Rudd guaranteed all deposits and wholesale term funding of all banks on October 12, 2008. It was the most effective megaphone in the history of banking — taxpayers stood behind every deposit. End of problem.
The Government still guarantees deposits up to $250,000.
So the question is this: if an Australian bank was on the brink of insolvency, and about to fail, would the Government really say: “OK, we’ll repay the deposits up to $250,000 but everyone else has to look to the capital. Sorry”?
Or would another press release come from the PM’s office like the one on October 12, 2008, upping the guarantee to include everything? I rather think it would be the latter.
It’s remotely possible that a smaller bank or credit union would be allowed to fail, so that the liquidator would have to call on shareholders’ money before selling or collecting on the assets, but it would definitely not happen with the big four. They were too big to fail in 2008, and they’re even bigger now.
In which case, in the real world, as opposed to the theoretical world of banking inquiries, capital is irrelevant.
It is too small to prevent a run, and anyway no government could risk letting it happen to a systemically important bank and would act first, and in any actual liquidation the capital would be gone in a trice once the liquidator started selling loans for cents in the dollar, and depositors would still lose plenty.
That’s especially true in the world of risk-weighted capital, where only 16 per cent, rising to 25 per cent, of real estate mortgages count against capital. That means the value of those mortgages only need to fall by about 2 per cent to chew through the capital.
So what is bank capital really for? Two things:
1. To provide the illusion of strength. Murray said Australia’s banks need to be in the “top quartile of internationally active banks when it comes to capital strength”. Really? Who says? And why quartile? Why not decile? Hell, why not be the banks with the most capital in the world?
2. To ‘tax’ shareholders and depositors for the government guarantee. The Abbott Government proposed an actual deposit levy but that was blocked by the Senate. Maybe Malcolm Turnbull will back his ability to negotiate one through, but in the meantime, increasing the capital requirement is a way of achieving the same thing. So far Westpac has announced that the tax is 20 basis points on deposits. The problem is that the Government doesn’t collect that money.
The argument between regulators and banks over capital is really an argument about taxation.
The truth is that big banks could have no capital at all because they are too big to fail, still.
This from The Australian 20/10/2015 by Alan Kohler
www.theaustralian.com.au/business/opinion/bank-capital-is-an-illusion/story-fnp85lcq-1227575122314
