Martin Wolf has an article in the FT this morning which is good.
First, he says we have a bank crisis, and I agree with him.
He rationalises this by noting US Federal Reserve banking data. This suggests that there are approximately $2.1 trillion of assets to underline the US banking system at present, which system has $22.8 trillion of assets.
Then he cites a paper suggesting that there are at least $2 trillion of unrealised losses in the US banking system at present, meaning that assets are overstated by that amount. He comes to the conclusion as a result that the US banking system is running on empty: it has no reserves.
This is why Danny Blanchflower and I called for a 100% guarantee in bank deposits yesterday: this is the only way to stop a flow from smaller to larger banks that might wipe out the smaller institutions.
This is why we, like Wolf, suggest banking reform is required.
Wolf goes for central bank deposits for all funds. He virtually eliminates the role of the commercial bank as we now have it. That's a discussion to have.
The point at this moment is threefold.
First, there is a crisis and action is required. That is a rate cut this week and a deposit guarantee in the first instance. That leaves something to argue about in place.
Second, there is a need to reform audit so that these hidden losses are revealed.
Third, this time it has to be real: this has to happen. We cannot keep having these fiascos. And that means, amongst other things, that central bankers have to lose their pre-eminent role in policy making where as a result they think they have the duty to keep wages low to serve the economic interests of a few in a way that always leads to an economic crisis.
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Why can’t the banks just lend themselves some money, not due for say 500 years by which time inflation will have rendered it valueless?
Debt has to be to a third party who believes it will be paid
It sounds vaguely as if Wolf is pushing us towards CBDCs… I say that admittedly without reading the paywalled article… but it’s interesting to me as one of the world’s better ‘conspiracy theorists’ (James Corbett) was recently suggesting one of the aims of the financial meltdown is to herd us towards CBDCs. I reserve judgement on that, however I do recall it was in the Bank of England’s March 2014 Quarterly Bulletin that the commercial high street banks were outed, if that’s the right term, as money creators rather than money lenders. Other Central Banks like the Bundesbank, the Norges bank etc. have done something similar in recent years. More recently still, Central Banks working in concert have remorselessly raised interest rates undoubtedly in the sure knowledge this would inevitably lead to the collapse of commercial banks by making their assets worth less than their liabilities. A casual observer, bearing their behaviour over the last several years in mind, might think the Central Banks had it in for the commercial banking sector. We all know they’re working on offering the public CBDC accounts at their central facilities too. Hmm… or perhaps WTF would be more appropriate.
It does feel as though that is where he is going – but he does not answer the question who then creates the credit?
There is massive thinking to be done
I had to look it up, but assume that CBDC = Central bank digital currency.
https://en.wikipedia.org/wiki/Central_bank_digital_currency
Bank of England comment: https://www.bankofengland.co.uk/the-digital-pound
With reference to MMT: #buildbanksbetter: Central Bank Digital Currencies (CBDCs), Public Banks and Money’s Potential as a Non-Scarce Medium of Communication and a Source of Local Self-Determination, https://muse.jhu.edu/article/867808
And CBDCs: The Good, The Bad, And The Ugly, https://news.crunchbase.com/fintech-ecommerce/cbdcs-the-good-the-bad-and-the-ugly/
What gives you credibility that you consider yourself an expert on global banking?
Those I work with say I know about it
What are yours?
James, if you are an informed expert it would be good for you to briefly share what is happening with global banking now.
Tony….. some commentators are writing that At1 bonds issued are the same allover, they are not, far from it. With regard to CS AT1 bonds they are named in writing: “write down bonds”. If that isn’t a big enough hint, the T&Cs make explicitly clear in what circumstances the bonds “may be written down to zero”. And the Swiss regulator can drive a Hummer through the clauses. So now we have a huge backlash about the fact that FINMA respected the rules of the bond prospectus rather than what investors thought they’d bought. The reality is that the swiss AT1 rules were always ridiculous. They are, in effect, not at all debt instruments but subordinated preference shares. Investors should have rejected the terms on day 1. I recall reading the terms of the UBS one when they first came out – it was clear AT1 could easily be wiped to zero. Yes, there was a small assumption / whisper campaign to say that if it came to it there’d of course be an equity raise before the AT1 was hit. And many clearly chose to believe that – but it was never in the terms. The right way to respond to this is to make the Swiss AT1 debt plummet in price by charging it a higher cost than the equity – I think 15% at least. But professional investors whinging about the fact they didn’t read the terms elicits relatively little sympathy from me, and I suspect the courts won’t be too sympathetic either.
That all said the vast majority (even all) of At1 debt issued by EU, US or UK entities will not have the Swiss provision. And yet many commentators write as if they do. That is my point. So whereas the Swiss bonds are and always have been uninvestable the rest of the universe have the risk reward profile commensurate with the risk. Indeed the At1 ETFs are up sharply from the levels reached at the time the CS takeover was announced so that doesn’t suggest contagion just the cost of capital has gone up (but far less than the Swiss). A rise in the cost of capital is not contagion and it is not a full blown crisis. This is a minor blip compared to 2008.
You are a troll
And if this is a blip Yellen would not be discussing bank guarantees which is whether the big issue is
In fact , you’ve missed all them
Strangely, the courts do not decide each day, or overnight the fate of banks. The confidence and trust of lenders and depositors, do; and that, much more than the small print and boilerplate of CoCo Bonds, is what is at stake.
We don’t see eye to eye on a lot of the nitty gritty of what is going on but I think we have “big picture” agreement. I agree with your 3 points of action.
On the size of the “hidden losses” we need to be careful; there are also lots of “hidden profits”. Most banks run interest rate hedges that will show “hidden profits” to offset the “hidden losses” so I am afraid we just don’t really know the size of the problem. Systemically important banks report all of this stuff virtually “real time” to regulators but I am unfamiliar with what regime US regional Banks operate under… but it clearly not good enough. I don’t think this is a UK problem (although UK banks are not insulated from the rest of the world)…. but it is a property crash that would really stuff them – and that IS a real risk. Yes, it has been modelled etc.. but Yogi Berra said, “In theory, theory and practice are the same thing… but in practice they are not!”
To your specific points….
(1) If you mismanage interest rate policy then it will have profoundly negative effects on the real economy which will feed through to banks. Rates need to be lower to reflect economic reality… not save banks.
(2) Hidden losses were never what the “banking book” was intended for. You can’t mark SME loans to market and they belong in the banking book – liquid securities with market prices have no place in it. This must change.
(3) Central Banks need a broader group of decision makers – trade unionists, small business owners, etc.
No one forces a sake to realise profit
Creditors force sales to realise losses
They are only remotely related as a result
Agreed re 1, 2 and 3, but SME losers are easily modelled would be my answer. Of all modelling that must be amongst the simplest. Big sample, sector based, security easy to appraise
Like Wolf, I do believe we need drastic bank reform. CBDC’s are a way forward. The option would be do that overnight and just bite the bullet, guranteeing all bank deposits. Which seems to me a fair solution since as a society we just want to use money and not think too hard about it.
Or we introduce it slowly as the BoE is looking at psotentially introducing right now. Which is a bit more of a delicate operation.
You do get the feeling that we are on the edge of a major reorganisation of the way we do banking. The bank lobby is the biggest obstacle however and they will fight tooth and nail to stop any such reforms. One doesn’t have to think too hard to know the reason why.
We do not have to accept this situation. As Adair Tuner(ex UK bank reguator and banker) said, most of what bank do is “socially useless”. We do need banks of course just not the banks we have.
The BOE have posted with regard to AT1’s and share holder losses, supporting the swiss crises. Yet we are going to have interest rate hikes? Maybe it’s time to rethink banking and bring it back to centralization? The banking
system, has certainly become too big to manage,,, we need to start investing in people and the planet. Not the extraction that we are.
Commercial banking is a mess. It was in 2008. It is now. Wolff appears to be arguing to eliminate it; if so, that is the end of private sector, free enterprise commercial banking, whatever pretence they come up with to explain it away; now that would be ironic.
I have always thought 2008 proved that commercial banking was no longer fit to undertake the responsibility its banking licence commits it to observing. This failure is confirmed, yet again by the latest crisis. Commercial banking is institutionally irresponsible.
Your three points are sound, but short term fixes. Fundamental reform is required. Public sector and mutual fund High Street banks should be on the table for reform. Louche, bonus-driven, free enterprise High Street banking should not.
Here is a summary of the BoE’s own case for CBDC’s:
“The way people pay for things is changing. People are not using cash as much as they used to. Digital payments are becoming more common.
There are also new forms of money on the horizon. Some of these could pose risks to the UK’s financial stability.
In light of these trends, the Bank of England and HM Treasury judge there is likely to be a future need for, and benefits from, a digital pound.
The money we issue as the UK’s central bank is the anchor of confidence in our monetary system. This type of money supports the UK’s monetary and financial stability. Today, banknotes are the only type of money we provide for the public to use. Having a digital pound could help us to keep providing this anchor for the UK.
Cash is also very important to ensure people are able to exchange one type of money for another. For example, you can withdraw the money you have in a bank account as banknotes at a cash machine. This is known as ‘uniformity’ of money. Having a digital pound could help us to keep this uniformity in a future where the majority of payments are digital.”
Notice that the BoE does not describe CBDC’s as ‘money’, but “digital payments”. CBDCs therefore are designed as a form of demonification; the reduction of money to credit. The point of money is, it has a life separate from banks. Everything else is just credit, with no ‘promise to pay’ that is guaranteed even in a banking crisis. The proposition that cash survives, save as a curiosity in a digital world where banks try to ensure all transactions are brought within their ambit and control (and turned into credit of lower independent security than ‘money’, that they can then use as a stock to exploit for profit, at will).
The only reason I can see for digital currency (as distinct from low grade credit) is for secrecy; and secrecy is the gold standard for money laundering. So what is the BoE preparing us for? The time when the Black economy is bigger than the rest of the economy? The official acknowledgement that the crooks have finally taken over the whole world?
Allow me to expand my concerns a little. Prima facie the ‘digital pound’ (that is a payment medium, not cash) could be attractive, as it allows the central bank to guarantee its security, just as cash does; but credit with commercial banks can’t.
The problem lies in the detail. A little more detail is available in the BoE’s ‘The Digital Pound Consultation Paper’, here: https://www.bankofengland.co.uk/-/media/boe/files/paper/2023/the-digital-pound-consultation-working-paper.pdf?la=en&hash=5CC053D3820DCE2F40656E772D9105FA10C654EC
The BoE is trying to make the ‘digital pound’ look like cash; but it isn’t. Why? Because this is what happens: there is the ‘digital pound’, and there is a ‘wallet’. The ‘digital pound’ is the end-users; but the wallet isn’t. someone else owns the wallet, and a whole pack of others – as far as I can see these will turn out to be ‘the usual suspects’; the corporate bank and finance sectors spin-outs, and the elite inner circle of select dealers (show me I am wrong here), who will have special access to the wallet. In other words, as far as I have been able to think this through so far; the usual suspects will now not just hold the account of your bank card, as now; but with your ‘digital pound’ they now have their hand in your wallet too. Here is what they say about the ‘wallet’ and its meaning:
“The Bank would build and operate the ledger – a highly secure, fast and resilient technology platform – which would provide the minimum necessary functionality for the digital pound. Regulated private firms – Payment Interface Providers (PIPs) and External Service Interface Providers (ESIPs) – could then access the core infrastructure via an application programming interface (API). These private sector firms would deal with all user-facing interactions, including handling customers’ information, and be able to develop and offer innovative services using the digital pound (Diagram D.1)”. (Consultation Paper, p.53 for quote; read pp.53-62 for Payment Interface Providers)
In my further comment, it should read ‘a whole lot of others will have access to your digital pound’.
Thanks