All the banks are weak, but some are more than others. That is the main lesson left by the turbulence of the market around the Deutsche Bank. However, there are many others: the approach that is being applied to punish the banks for their failures is more like firing a blunderbuss than a rifle; and still it is difficult to recapitalise the banks without recourse to public money. But, above all, to more than nine years from the start of the global financial crisis, the concern for the health of the financial system remains high, especially in Europe. This should not be surprising, although it does unsettle.
The immediate cause of the weakness of the Deutsche Bank was the demand of the U.S. Department of Justice that requires the bank to pay a fine of u$ s 14,000 million for allegedly engaged in misleading sales of mortgage-backed securities.
But the entity is structurally weak. His name is also misleading: not having a solid retail bank in the highly fragmented German banking system, it is primarily a bank of global investment is very similar to Goldman Sachs. In an effort to maintain high profitability, Deutsche Bank is highly leveraged by the standards of its rivals. Close to half of its 1.8 billion euros of assets is linked to its trading activities, and a significant proportion of these assets, 28.800 million euros do not have market prices. Even by the standards of his peers, is a bank highly leveraged with a dubious business and assets turbid.
what, Then, teaches us all of this turmoil? A first lesson is that banks are still business significantly fragile. By their nature, are entities extremely leveraged with liabilities ultralíquidos and assets are highly illiquid. The balance sheets of many banks are also enormous. The clients consider the liabilities liquid of the institutions as a reliable repository of value and means of payment. The banks are also fully interconnected directly through their transactions between themselves and, indirectly, by means of the euphoria and panic.
The high yields on the capital pledged by the banks before the crisis were dependent on a leverage extremely high and, hence, the support of the taxpayers during the resulting crisis. Even the solid entities benefit from the support received by the institutions weaker post-crisis, as it helps to keep you on foot to their counterparts and, therefore, to the system. As public institutions have been dragged into the bowels of the industry, such as insurance companies of their liquidity and their solvency, they also have been forced to impose ever-stricter regulations. The recent turmoil of the market reminds us all of this.
A second lesson reveals to us that the way to punish the banks for their numerous crimes is not satisfactory. It is reasonable for regulators to punish the shareholders for the misdeeds of their banks. However, we must ask ourselves if it makes sense to impose a penalty so high as to be detrimental to, the survival of an institution. And, what is much more important, the idea that shareholders control the banks is a myth. Is the management responsible. What remains daunting is that it has punished the shareholders and a few employees of low hierarchy, but the charge of running these institutions have escaped more or less unscathed. In fact, this is an explanation of the rise of Donald Trump.
A third lesson is that banks are still descapitalizados in relation to the scale of their balance sheets, as Anat Admati and Martin Hellwig have pointed out. More immediately, the lack of a reliable means to rectify this situation. Therefore, while governments insist that the bailouts have been ruled out, few would believe —especially in the case of a bank the importance of Deutsche. The European Central Bank (ECB) has proposed bailouts temporary as an option. But it is hard to believe that this type of bailouts at some point reverse. In practice, the private creditors would be the escape and the government would end up being the owner of the bank in question.
In contrast, Adam Lerrick, of the American Enterprise Institute has proposed a “mirror image”: a recapitalisation internal bail-in temporary on the part of private creditors. Your plan arises from the need to prevent more government bailouts. A recapitalisation internal temporary on the part of creditors would raise the bank’s capital to an adequate level. If the bank was the object of only a panic temporary, it would be possible to accumulate capital again once those fears have faded. Claims of creditors could then be reconverted into debt, to the couple. If it were to prove impossible to raise capital in the future -due to the capital deficit was structural – the recapitalisation internal would be permanent. To protect the small creditors, only the excess of the holdings of each of the investors above, for example, 200,000 euros would be converted into capital. The probability of a recapitalisation internal of this type and the possibility of it becoming permanent would affect the price of the debt, as it should be.
In summary, the problem of the banks has not gone away. A fundamental part of the danger is that these institutions are inherently fragile. It is also likely that the balances inherited from the excesses of the pre-crisis period are not sufficiently profitable and that, therefore, have to reduce them. Most important of all could be the impact that the new information technologies and new business models have on the health of the historic banking industry, particularly given the damage caused to his reputation of entities competent and decent. Many would add to all this the effect on the profitability generated by the monetary policies ultraflexibles applied by the central banks.
however, before this, keep in mind that these reflect the economic malaise post-crisis. If the monetary policy was more strict and, thus, the economies were weaker than they are today, the banking sector — in the last instance, a component leveraged and extremely volatile the economy as a whole— it would also be more fragile.
recently, the focus was on the Italian banks. Currently points to the Deutsche Bank. Very probably, the latter will not give rise to a major crisis. But the risks in the banking system persist. The solution is to make sure that there is adequate capital at all times and, in its absence, sufficient debt to support the recapitalization of internal. And, in the absence of both, the banking will remain a time bomb.
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