It's now become clear that the depositors' "haircut" at the heart of the recent bailout plan for Cyprus wasn't just an idea that emerged out of a clear blue sky. Financial authorities in many parts of the world are looking at plans to deal with future crises through a "bail-in" of a troubled bank's creditors, possibly including its depositors. Canada's recent budget, prepared before the details of the Cyprus scheme emerged, had a reference to the development of such a plan buried deep in the fine print.
This news has led to a predictable outbreak of hysteria among the usual gang of wingnuts and goldbugs. Most of these worthies have convinced themselves that a co-ordinated Cyprus-style deposit grab is just around the corner, as "global elites" protect themselves from an inevitable financial meltdown. It's not just the paranoid fringe that's piling on here, though: respectable newspaper columnists and quite a few well-known economists have roundly condemned the Cyprus bailout as mad, bad and dangerous.
Is it really? Let's try to get a bit of perspective here.
When banks are about to fail, there are two things the financial authorities can do. One is to let them fail. We all saw how well that worked with Lehman Brothers -- though I'm still in the Michael Lewis camp on that one: the problem wasn't that Lehman was allowed to fail, but that it had been allowed to succeed. The alternative is to try to bail them out or in some way stabilize them, and this is what was done all around the world in 2008 in an attempt to stem the crisis. The litany of names is all but endless -- Northern Rock, Lloyds TSB and RBS in the UK, Dexia in France/Belgium, UBS in Switzerland, AIG in the United States....and in addition to the rescues of specific institutions, we saw unprecedented measures to support the entire global financial system, including the TARP program in the US and quantitative easing in both the US and the UK.
Has it worked? Yes, in the sense that there have been no more major financial collapses in recent years. No, inasmuch as we are as far as ever from re-establishing normal conditions in financial markets. Banks (even the ones that are not "zombies") are still risk averse, and as a result it is proving frustratingly difficult to generate the kind of economic growth that will ultimately relieve the pressure on markets and institutions.
What is indidputable is that the financial bailouts imposed massive and ongoing costs on taxpayers around the world. This was, not surprisingly, unpopular, especially as the bankers themselves seemed to be "getting away with it". And the impact on the fiscal positions of governments in countries implementing bailouts, from Ireland through the UK to the US, has been severe.
If there were to be another major financial meltdown any time soon, it would be very difficult for governments to ride to the rescue again as they did five years ago -- neither their taxpayers nor the bond markets would stand for it. So it's no surprise that governments are looking at alternatives, and that their lupine gaze has fallen on banks' creditors, including depositors.
Which brings us to the issue of deposit insurance. If, like a lot of the folks at the sites I linked to above, you are mortally shocked by the fact that the Cyprus bailout did not keep all depositors whole, ask yourself this: why do all national deposit insurance schemes specify a limit for the amount of an individual depositor's funds that they protect? The limits vary -- $100,000 in Canada, 85,000 GBP in the UK, 100,000 EUR in the Eurozone -- but they're there for a reason.
That reason is to encourage wealthy depositors to make their own judgments about the creditworthiness of the institutions to which they're entrusting their savings. Contrary to the opinions of some "experts" on the subject, deposits with banks are not in some form of "safekeeping". If they were, how would banks ever be able to pay interest on them? They wouldn't be able to do that if all their depositors' money was sitting gathering dust in a shoebox under the manager's bed. No, funds placed in the bank are used by the bank to make loans and do all the other things that banks do, and if you're lucky enough to be depositing more than the insured limit, it behooves you to find out a little bit about just what your bank is up to.
One of the mistakes that financial authorities made during the recent financial crisis was to tear up the deposit insurance limits and throw taxpayers' money at every potential loser, however unworthy. Ireland went the farthest in this regard, guaranteeing all deposits, with disastrous results. The UK government bizarrely extended guarantees to people who had stuffed money into Iceland's notoriously wobbly banks, and then attempted to stick the Icelandic taxpayer with the bill. What bank depositors should be learning from the Cyprus bailout, and the noises about similar ideas coming from many parts of the world, is that if it all goes pear-shaped again, the Governments will be sticking religiously to the terms of their deposit insurance arrangements. So if you have more than the insured limit, the message you should be hearing loud and clear is, caveat depositor.
Is there any alternative to bail-outs and bail-ins? For many in the media and the blogosphere, the answer to that seems to involve introducing "banksters" to a knotted rope and a gallows pole, but that won't get anybody their money back. However, there is an important new book -- The Bankers' New Clothes, by Anat Admati and Martin Hellwig -- that argues that the solution is to make banks hold much more equity capital than they do at present. They argue that capital should be built up quickly by forcing banks to retain earnings rather than paying them out as dividends, and claim that a switch to a more firmly capitalized banking system would not have any overall negative impacts on national economies.
I mentioned this book briefly in a posting a few weeks ago, admitting at the time that I hadn't actually read it. I have now. It's available from Amazon, and there is a Kindle version. It's a bit dry and repetitive, but the arguments are strong. The authors are almost certainly right to say that it's only a lack of political will that will stop governments from imposing a solution of this sort on their banks. If you flinch at the thought of a Cypriot buzzcut, this is the alternative you should be urging on your elected leaders instead.
No comments:
Post a Comment