Tuesday, 26 March 2013

Who would lend money to a bank?

Who would lend money to a bank? Well, all of us - everyone who operates a current account. Under UK law money paid into your account is a 'chose in action' and becomes the bank's property. You become merely a creditor of the bank I was reminded of this last year - with the matter still not resolved - when I became the victim of card fraud. Or rather, the bank did. When the fraud department asked "Have you reported this to the Police?" it was a question intended to verify the validity of claims rather than to elicit a useful response; the banks know very well that the Police won't take reports of card fraud from customers, as I explained to the clerk on the phone "No - it's your job, not mine, to report it to the Police - it's your money, not mine, that's been defrauded".

It's a fundamental point, and one which I suspect is not readily apparent to account holders with Cypriot banks. The banks don't put your savings in a safe and guard them - they gamble them recklessly, squander them in ill-advised ventures and lend them to people who can't repay them, and at the end of it all if the firm becomes bankrupt you are just another creditor with a shared claim on what assets remain. The government, of course, have intervened by guaranteeing deposits up to a certain amount, but this is a policy, and not a legal obligation.

Max Hastings in the Mail today calls the Cypriot action "One of the nastiest and most immoral political acts in modern times" - that is, requiring the shareholders and investors to take the haircut rather than the taxpayer. Well, frankly, it's not. Those savings haven't been 'stolen', they've been mis-invested in firms (banks) with an inherent risk of failure. One balances the risk of lending one's money to a bank and its failing against the risk of keeping the cash under one's bed and its being stolen.

And this is the real danger of Cyprus; not the legality or morality of the action, but that it may propel investors across Europe to feel better protected with their cash hidden at home than on loan to a failing bank. Once a run starts, once confidence goes, the whole fractional reserve edifice inevitably comes tumbling down.


Blue Eyes said...

"it may propel investors across Europe to feel better protected with their cash hidden at home than on loan to a failing bank"

Yes, that is precisely what the whole bail-out regime up until now was supposed to prevent. The Dutch minister really let the cat out of the bag!

DeeDee99 said...

"that is, requiring the shareholders and investors to take the haircut rather than the taxpayer. Well, frankly, it's not."

Generally speaking you are of course right. That is how capitalism is supposed to work - either the investors take the hit or the company folds and they lose the lot.

But the EU (and British Govt of course) skew the arrangement by guaranteeing deposits up to a maximum of E100,000. And that was why there was such outrage at the proposed Confiscation of Assets for people with relatively small savings.

There is less outrage at depositors with over E100,000 losing 40% of their savings because it wasn't guaranteed.

There may well be a lot of information hidden from us - but what the Kommissars' actions are likely to cause is the transfer of large deposits outside of the Eurozone.

The Russians may not be complaining too vociferously because (a) they had an opportunity to bail the Cypriots out and didn't take it (b) they probably also don't want to see the Eurozone/EU collapse because of the knock-on effects and (c) there is more than one way to recover your money/get revenge.

Anonymous said...

As far as I am concerned, this misappropriation of depositors funds (let's not forget the money held in accounts that was just about to pay this months wages and money held on clients accounts to pay tax bills and money held on account in all sorts of businesses that have nothing to do with "lending" money to banks) is a side show compared to the Dutch finance ministers comments.

Coney Island

Weekend Yachtsman said...

What's the difference between them raiding your savings account, and them taking half of your salary before you even see it?

Theft - it's what the state does.

Anonymous said...

And we've had far more than 6.6% of our relative wealth confiscated via qe driven devaluation here in the UK...

Anonymous said...

All the Dutch Finance Minister did was tell it as it is. If a bank goes bust, the shareholders, bondholders and then the unsecured creditors get the bullet, in that order. It always was the case, and should have been the case with RBoS, HBoS and others. We'd be in a lot less deep doo-doo now; ask the Icelanders. Gordon Brown put his re-election chances and the Labour Party ahead of all else. Not that Cameron is above the same trick - trying to engineer a new housing bubble? Insanity.

Pointless, really, whiffling about capital flight as far as the average private depositor is concerned. They have neither the knowledge nor the resources to move money out of the Eurozone, and if they did the web of international money-laundering regulations knocks it on the head pretty effectively.

I do hope we (UK taxpayers) don't end up on the hook for recompensing wealthy retirees who lose cash as a result of their choice of retirement destination. Funnily enough, though, I suspect the howls will be audible shortly.

Blue Eyes said...

" there is more than one way to recover your money/get revenge."

Well the Russian chap on Newsnight stated this explicitly. He said that German companies would start feeling the pressure, etc...

Anonymous said...

" requiring the shareholders and investors to take the haircut rather than the taxpayer."

Well, that's called the capital structure, some folks get high return for significant risk. The riskier tranches of the capital structure go first in a cram down. Stock holders - bond holders etc.

This tried and tested process has of course been totally destroyed the UK by in the first instance, Flash Gordon.

But in the States the GM stick save also destroyed the established capital structure.

Anonymous said...

They get a high return for significant risk.
Yes, but the risk is not that of those investing. It is the depositors money, and life, being risked on schemes which have a guarantee of, at best, a return of original capital. at worst, the loss of same plus liability for the remainder of debt.
They lend you money to buy a house, with no money involved. You buy the house and pay back the money, of which none was actually given, and also interest on that never-existing money. During that period between the purchase and pay-off the house is actually part of the assets of the lender (who never lent you anything anyway).
In the UK the GM standard is being maintained by the PFI initiative, where a 10-million quid hospital gets built and the payback amounts to several times that amount. Or more.
Have a read:

Anonymous said...

One of the worlds largest asset management companies has considerably lowered its exposure in Italy and Spain, with a warning that if conditions continue to deteriorate it will reduce its investment further (3.7 trillion dollars under managment)