DECEMBER 2014 / NO. 1
TAGS: BANKS, CRISIS, EUROPE, US, BANKERS, LIBOR-GATE, MANAGEMENT, ANAT ADMATI, POLITICIANS, REGULATIONS, GOVERNMENTS, NASSIM TALEB, BLACK SWANS, GREY SWAN, EQUITY, ASSETS

Banks, business as usual

“We see that banks try to improve their ratio’s by shifting risks. However, these risks stay within the financial system. The system risks have not been reduced, and have in fact increased”, The Centre for European Policy Studies
Can you imagine that five years after the financial crisis, the financial system in Europe has still not yet improved? Banks still continue to package ‘risky financial products’ into special entities. Our bankers still behave the same as they did before the financial crisis. Why is this so? Bankers think they are better protected against the next financial crisis, because they have a higher percentage of equity on total assets. It’s business as usual all over again.

Equity on total assets

In November 2013, we could read that some fifteen banks were fined billions of euros because of Libor-gate and the forming of cartels. Research from the European Banking Authority showed that there were around 4,000 bankers in Europe who earned more than € 1 million in 2012. These numbers are growing! Another remarkable issue is that banks in Northern Europe in countries such as Belgium, Finland, Germany and The Netherlands, are much weaker than banks in Southern Europe. Why is this? Because the top management of the banking system in Northern Europe knows that their governments will rescue them when the next financial crisis occurs: they are too big to fail. The International Standard of ‘equity on total assets’ is just 3%: the EU wants to increase this to 4%. In the previous post “BANKS: MISPLACED, MISLEADING, AND MISTAKEN FALSE ARROGANCE”, we listed twelve arguments from Professor Anat Admati at the Stanford Graduate School of Finance as to why this should be increased to 20-30%.

The role of politicians?

Politicians have not generally shown much courage. This is because they assume that during the next crisis the large bond holders and savers will have to pay via ‘bail-in’. But this is a false assumption, which will not happen. And this is because during the next financial crisis a ‘bail-in’ will cause a huge domino effect. Politicians try to control banks with more and more regulations, and banks continue to circumvent these regulations. Business as usual.
There is, however, a solution.

The solution to overcoming the next financial crisis

The ultimate solution is not to split banks into retail and investment banking, but rather into domestic and international banking. This will force the bankers to go back to serving their customers at both a regional and local market level. It is time to change, and time for new ideas, because all systems are down whether at governments, hospitals, housing corporations, energy/insurance/telecom companies or at banks. Each of these sectors is suffering from a serious lack of new ideas, energy and passion. They are all focused on money and earning more money and no longer on the ideas for which these institutions and organizations were originally founded.

New Grey Swan

In 2007, Nassim Nicolas Taleb published his hugely successful book “The Black Swan”. Black swans are large-scale unpredictable and irregular events which have massive consequences. It is not feasible to prepare ourselves for Black Swans. But we can, however, prepare ourselves for Grey Swans. These are events which have a very high impact, but for which organizations are able to prepare themselves.
The current banking system with far too low percentages of ‘equity on total assets’ is not simply a Grey Swan, it is a huge Grey Swan.
“Postdictors, who explain things after the fact, because they are in the business of talking, always look smarter than predictors”, Nassim Nicolas Taleb
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