Archive for March, 2013

No more Crony Capitalism

Crony capitalism

Every western government now owns a plethora of nationalised banks. How hard is it to pick one, make it an ultra-safe National Bank, ban it from being involved in stock market or derivative trading and demand that it maintain a massive capital adequacy ratio. Given its ultra conservative nature, it could offer the safest borrowers the best terms, its depositors the safest haven and offer the most secure, though not the most exciting, returns to shareholders. It would be a boring and stodgy but secure investment opportunity that would be very welcome to investors in the current volatile market. Most banks used to be like this a generation ago.

In the future, any bank that fails can have its serviced loans and any remaining deposits folded into the National Bank, as the FDIC does so efficiently in the U.S. currently. When the crisis is over, slowly divest the government’s shares in the National Bank to the widows and orphans investment market.

Anyone who wants better returns is free to go to the open market to find it, but should expect no government backed bailout. If you want easier credit terms, the market offers plenty of choice, but at significantly higher interest rates to cover the extra risk. If the deposit interest rates on offer are too dull, you’re free to put your money elsewhere on the understanding that you stand to lose every penny if your bank implodes. If the stock price gain and dividend is a big yawn, you’re free to go to the lightly regulated banks, but be fully aware that you could lose it all. Don’t come crying to the taxpayer via the government if it all goes tits up.

If any other bank wants to compete with the national leader and avail of government deposit insurance, and some building societies and credit unions may well do, no problem, so long as they are prepared to submit to the much higher capital ratios and more restrictive rules required for a National Bank. Leave the market open for any banks to do whatever they want, but make sure that its depositors, bondholders, shareholders and counterparties are fully aware that they are on their own if the bank implodes through mismanagement and that none of the losses will be covered by the taxpayer.

Make every single bondholder, depositor and shareholder, read and sign a clear simple one page statement in plain English and large text that they understand this before their money can be accepted.

Let’s have a proper free market and not the crony capitalism we have now. Let investors diversify their investments according to their own risk appetite and not expect some other sucker to come in and bail out their bad decisions. It would be a salutary lesson in hubris and it’s consequences every decade or so.

Let’s finally be rid of the cancer of the too big to fail banks.