Carney declares Mission Accomplished on banks

Last month Mark Carney, head of the Financial Stability Board as well as governor of the Bank of England, told us that the problem of banks being ‘too big to fail’ had been solved.   If only.   He wants systematically important banks such as HSBC to hold more equity and debt, enough to absorb losses when they come under pressure.   He is pinning his hopes on the new concept of ‘total loss-absorbing capacity’ (TLAC),  which he reckons should be worth between a fifth and a quarter of risk-weighted assets, as sufficient to prevent a taxpayer bail-out at the next financial crisis.   He described this as a “watershed in ending too big to fail”.   However this is declaring Mission Accomplished a bit too soon.   There are grave doubts whether his ‘solution’ is anywhere near adequate.

First, the new rules won’t come into force till 2019, by which time the big banks will have to raise hundreds of billions of dollars/pounds to achieve their TLAC, and the idea is that regulators can then ‘bail-in’ the holders of all loss-absorbing money by wiping them out or converting their holdings into shares.   The snag here however is that many of these investors will be pension funds and insurers which makes imposing big losses on them politically problematic.   Think of the headline: pensions wiped out to rescue greedy bankers!

Then there’s the question of whether Carney’s plan is practical.   Several of the biggest banks like JPMorgan Chase and BNP Paribas as well as HSBC, have assets worth more than $2 trillion and more than a thousand subsidiaries.   How will regulators then co-operate without a globally agreed bank resolution regime, to stop local assets being seized to protest national interests?   There is also the danger that bank bail-ins will be subject to legal challenges, as has already happened in Portugal.   An even bigger risk is that if much of the loss-absorbing debt is held by hedge funds, contagion could spread across the financial system and bank to banks.

A third major doubt is whether Carney’s plan will work if it excludes 3 of the world’s 10 biggest banks by assets which are located in China where there are serious concerns about that country’s financial system.   An even more pressing objection is that, rather than making some bank debt function more like equity by allowing it to be bailed in, why not simply force the banks to hold a lot more equity?   Or coming back full circle to where we started from, why not solve the the too big to fail problem by splitting off the highly risky casino bits (the investment banking arms via a revised Glass-Steagall) and/or requiring banks to be smaller?   Why not indeed?

3 thoughts on “Carney declares Mission Accomplished on banks

  1. Another failed banksters from canada didnt he leave canada to help george out one inside one outside cooking the books nah believing anything carney or george state is
    Not gojng to help but then both are good at fiddling the figures just
    wonder how they got away with it for solong jeff3

  2. yet these fraudsters are still taking us to the cleaners under the austerity measure whilst their leader it seems is putting on weight funny isn’t when most find they losing weight losing money and cant afford to live like our politicians funny world isn’t it jeff3

  3. ps if it wasn’t so

    The corporate boat race

    An American automobile company and a Japanese auto company decided to have a competitive boat race on the Detroit River. Both teams practiced hard and long to reach their peak performance. On the big day, they were as ready as they could be. The Japanese team won by a mile.

    Afterwards, the American team became discouraged by the loss and their morale sagged. Corporate management decided that the reason for the crushing defeat had to be found. A Continuous Measurable Improvement Team of “Executives” was set up to investigate the problem and to recommend appropriate corrective action. Their conclusion: The problem was that the Japanese team had 8 people rowing and 1 person steering, whereas the American team had 1 person rowing and 8 people steering.

    The American Corporate Steering Committee immediately hired a consulting firm to do a study on the management structure. After some time and billions of dollars, the consulting firm concluded that “too many people were steering and not enough rowing.” To prevent losing to the Japanese again next year, the management structure was changed to “4 Steering Managers, 3 Area Steering Managers, and 1 Staff Steering Manager” and a new performance system for the person rowing the boat to give more incentive to work harder and become a six sigma performer. “We must give him empowerment and enrichment.” That ought to do it.

    The next year the Japanese team won by two miles. The American Corporation laid off the rower for poor performance, sold all of the paddles, cancelled all capital investments for new equipment, halted development of a new canoe, awarded high performance awards to the consulting firm, and distributed the money saved as bonuses to the senior executives.
    sounds a lot like these in power sums it all up but they have their serco atos crapita maximus and many more to name

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