Guido Ravoet of the European Banking Federation in a letter in the Financial Times today claims “…banks hold significantly more safe capital and there no longer is a need to call on taxpayers if a bank fails.”
Either Ravoet is clueless or he is lying. And in case you’re tempted to question the possibility that senior bankers are clueless, a senior executive at Santander admitted a year or so ago that she knew nothing about banking. And the same seems to be true of several people at the top of the UK’s disaster prone Coop Bank.
Anyway the flaw in Ravoet’s above claim will doubtless be obvious to most FT readers and anyone else with a basic grasp of bank balance sheets. The flaw is thus. (It’s amazing / tragic that I even need to spell it out).
Bank capital ratios in recent years have been around the 3% level, which means that if the value of a banks’ assets falls by more than 3%, the bank is technically insolvent. Of course the bank does not have to close its doors at that point as long as it thinks it can recover. But the more the value of assets fall the more suspicious the bank’s creditors become, and the more the chance a Lehman’s type event.
Now if a bank’s capital ratio has been improved from say 3% to 6% as a result of recent capital ratio improvements and all its other liabilities (just to keep things simple) consist of depositors and it goes bust, then where does the money come from to reimburse or safeguard those depositors?
It comes from taxpayers, just as in the case of the 3% ratio. Of course, improved capital ratios reduce the CHANCE of a bank failing, but they don’t remove the POSSIBILITY of it failing with taxpayers being forced to pick up the pieces.
In short, in short, Guido Ravoet is talking thru his rear end.
P.S. (31st May 2014). Just in case you think the word “liar” is too strong to use in reference to a representative of the banking industry, remember that J.P.Morgan is the biggest criminal organisation in the US: at least if one goes by the size of fines imposed on different organisations ($20bn in the case of JPM). Also see hereand here.