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Bloo Loo

Why Not Let A Bank Fail, Whatever Its Size

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Ok, we let NR fail...the depositors lost their money.

The bank is closed, the benefits the staff accrued are lost...Shareholders and pensioners lose out. Baldy MD doesnt get £300K in pension, all the jobs are gone...Bankers are on JSA.

People argue it is Depositors that are bailed out in the way we have been bailing...

OK. Lets consider the closing of the bank from the depositors point of view...their "asset" ( savings held at the bank) is the banks "liability" and therefore worthless to the bank, and good to get rid of as we have seen in the recent "bail ins".

What if, they had closed NR....as it stands, the depositors would have lost x thousands in spendable cash...amounting to billions now unable to be spent in the economy.....bad for GDP.

But lets suppose they had closed the bank and told depositors to put their savings in another bank by writing a NR cheque...and supplied the target banks with 10% in capital to cover the new liability.....sure the bank would have the new liability, but its reserve ratio ( assume its 10%) is unmolested....the saver keeps his spending power and its only cost 10% in printing, which of course is more than balanced by the wipeout of capital at the NR failed bank.

Im not talking QE, just the simple credit to the target bank of funds for free...real printing.

Would this work in the case of the TBTFs? and does it do away with Moral hazard, QE and its accompanying inflation?.

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This is an interesting idea. I'm sure it (or some variant) was considered at the time.

My immediate observations:

NR had about £20bn of retail deposits. Putting up 10% to cover that would have required £2bn. Isn't this about what the bailout cost anyway?

NR had a particularly low level of retail deposit funding. Other banks have far greater deposit bases. Possibly a difficult precedent to set.

Don't think it would have worked, or could work in other cases.

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....In that case that should go also for all businesses and people that have failed....zombie businesses running on empty, mortgage holders in arrears, people behind with rent, councils and governments.......what would be left standing? ;)

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....In that case that should go also for all businesses and people that have failed....zombie businesses running on empty, mortgage holders in arrears, people behind with rent, councils and governments.......what would be left standing? ;)

agreed.

The former employees of those companies and the handful left could buy the assets for pennies and start again. No pain, no gain. A mass government default would wipe the banks but they could still guarantee deposits as it would become an international credit reset.

[yes I know the interim would be anarchy in many places and that's what our leaders fear, it will happen eventually anyway]

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....In that case that should go also for all businesses and people that have failed....zombie businesses running on empty, mortgage holders in arrears, people behind with rent, councils and governments.......what would be left standing? ;)

thats my point...the bad bank would fail, the directors, staff and other interested parties would be wiped..the Entity sold off.

Meanwhile, depositors, the people WITH the money in the first place, would also be wiped out or get pennies on the pound.

Instead they chose to save the enity...the bald man got his pension, the Board was mostly kept on and fabulous salaries remained.

The problem with deposits and moving them to another bank is that they are LIABILITIES, and it seems unfair to burden the new bank with them on their own capital...hence, I propose the moving of deposits to the other banks, and they claim the 10% capital enhancement to cover them.

Meanwhile, capital is destroyed, most likely in similar amounts in the dead bank....inflation is defeated, ordinary folks spending power is preserved and the receiving banks have a raft of new customers.

The break up of the dead bank would hopefully acheive some income, the Government would be the first in line to make up for the capital it printed...for resolution and cancellation at the central bank of course.

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Banks didn't go bankrupt in 2007. They were bankrupt from day one.

Imagine two people on a desert island. One person is £100 in credit and therefore the other person must be £100 in debt.

If the person that is £100 in credit refuses to trade with the other person then that person is bankrupt and so is the bank that holds the balance sheet.

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Banks didn't go bankrupt in 2007. They were bankrupt from day one.

Imagine two people on a desert island. One person is £100 in credit and therefore the other person must be £100 in debt.

If the person that is £100 in credit refuses to trade with the other person then that person is bankrupt and so is the bank that holds the balance sheet.

Thats why I said the print would be for the capital required to cover the deposit liability.

Banks deal in balance sheets, not reality...hence the issue we have today...in your scenario, there is balance, but no activity. that is not bankruptcy...In addition, you introduced a third person to your example...the bank. which should be neutral...it wouldnt be earning either, but neither would it be bankrupt.

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Thats why I said the print would be for the capital required to cover the deposit liability.

Banks deal in balance sheets, not reality...hence the issue we have today...in your scenario, there is balance, but no activity. that is not bankruptcy...In addition, you introduced a third person to your example...the bank. which should be neutral...it wouldnt be earning either, but neither would it be bankrupt.

I'm thinking of the bank just being an entity not a person.

I think the best solution would be to bury some freshly printed coins in the sand so the debtor would have to work hard digging holes to find them.

In the real world pay him printed money to build some infrastructure like HS2.

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Meanwhile, capital is destroyed, most likely in similar amounts in the dead bank....inflation is defeated, ordinary folks spending power is preserved and the receiving banks have a raft of new customers.

This is the fundamental problem, that the amount of money in the economy would decrease dramatically. Northern Rock was not a large bank, but the amount of debt it was pumping in to the system with its 110% LTV mortgages meant the economy was booming. Strip out those mortgages and all of a sudden people cant pay their debts and the economy goes into free fall.

Whether the bank fell or not would have changed nothing really. The government would have just stepped in with QE and increasing government debt earlier than it did. Help to Buy, QE, government borrowing and House Price Bubble part 2 were an inevitability, their conception was in the 70s not the 00s.

Remember as well that Northern Rock was bailed out to avoid further bank runs. The banks are working on such low deposit to debt ratios that even a 3% deposit withdrawal would put real pressure on Sterling.

They should have done exactly that.

Bad business must fail, its the rules of capitalism.

We don't have capitalism, nothing even close to it really.

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I'm thinking of the bank just being an entity not a person.

I think the best solution would be to bury some freshly printed coins in the sand so the debtor would have to work hard digging holes to find them.

In the real world pay him printed money to build some infrastructure like HS2.

of course, in your example, neither person needs a bank, a credit or a debit. There appears to be no need for any means of exchange whatsoever.

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This is the fundamental problem, that the amount of money in the economy would decrease dramatically. Northern Rock was not a large bank, but the amount of debt it was pumping in to the system with its 110% LTV mortgages meant the economy was booming. Strip out those mortgages and all of a sudden people cant pay their debts and the economy goes into free fall.

Whether the bank fell or not would have changed nothing really. The government would have just stepped in with QE and increasing government debt earlier than it did. Help to Buy, QE, government borrowing and House Price Bubble part 2 were an inevitability, their conception was in the 70s not the 00s.

Remember as well that Northern Rock was bailed out to avoid further bank runs. The banks are working on such low deposit to debt ratios that even a 3% deposit withdrawal would put real pressure on Sterling.

We don't have capitalism, nothing even close to it really.

Mortgages are not "stripped out" in the event of a bank failure...they are the assets and would be sold to another bank...saying that, I suspect much of NRs lending was syphoned out to MBS in any case.

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You are forgetting that in the Bank's eyes, the banks are the engine for growth, for getting credit into the economy, oiling the wheels etc etc etc

Once you've printed the money and given it to a load of stupid savers (like those who deposited in Icelandic banks), what then? Who will keep the economy going? ;)

i wasnt proposing printing all of it..just a proportion to keep the target bank within its capital ratios.

Northen rock wasnt really a full bank..it was mainly people with savings accounts I suspect, and ex Building Society trying to be a bank...it didnt have a full banking Licence IRCC, but it did have an egg head for a boss. Applegit....bailed, and plenty of very highly paid management ever since.

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Thats why I said the print would be for the capital required to cover the deposit liability.

Banks deal in balance sheets, not reality...hence the issue we have today...in your scenario, there is balance, but no activity. that is not bankruptcy...In addition, you introduced a third person to your example...the bank. which should be neutral...it wouldnt be earning either, but neither would it be bankrupt.

If you are going to print money and give it to banks, why not just give it to NR in the first place? That would recapitalise it and would lead to minimal disruption. A bail out basically. The government would become the owner of the business, much as with RBS.

For the record, NR never went insolvent - it suffered a bank run.

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If you are going to print money and give it to banks, why not just give it to NR in the first place? That would recapitalise it and would lead to minimal disruption. A bail out basically. The government would become the owner of the business, much as with RBS.

For the record, NR never went insolvent - it suffered a bank run.

for one very good reason....Moral Hazard...the institution had failed....and the management were rewarded..

A bank run leads to insolvency due to the lack of funds a bank has on hand to meet its debts on demand. That is the whole basis for fractional reserve...that people wont all take their funds out at the same time.

Indeed, a bank that fails should never, according to the books, be short in paying out everyone once assets are cashed in...sadly, that particular lie is being exposed every week in the US as banks fail and FDIC is paying out.

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for one very good reason....Moral Hazard...the institution had failed....and the management were rewarded..

A bank run leads to insolvency due to the lack of funds a bank has on hand to meet its debts on demand. That is the whole basis for fractional reserve...that people wont all take their funds out at the same time.

Indeed, a bank that fails should never, according to the books, be short in paying out everyone once assets are cashed in...sadly, that particular lie is being exposed every week in the US as banks fail and FDIC is paying out.

Actually it was not insolvent based on its balance sheet because assets always exceeded liabilities in NR. Yes, it ran out of cash because it suffered a bank run. All creditors of NR got their money back.

You refer to fractional reserve banking as the reason banks run out of money, but it isn't. They run out of money because they lend money to borrowers.

Your moral hazard argument is totally correct, but I think a bail in would be better than a government bail out.

Edited by Ah-so

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of course, in your example, neither person needs a bank, a credit or a debit. There appears to be no need for any means of exchange whatsoever.

True but that is besides the point. The point is that banks have always been bankrupt. When a cyclist stops moving he falls off his bike. When new borrowers don't come along the existing debtors can't pay.

Edited by gf3

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Actually it was not insolvent based on its balance sheet because assets always exceeded liabilities in NR. Yes, it ran out of cash because it suffered a bank run. All creditors of NR got their money back.

You refer to fractional reserve banking as the reason banks run out of money, but it isn't. They run out of money because they lend money to borrowers.

Your moral hazard argument is totally correct, but I think a bail in would be better than a government bail out.

No bank should be insolvent according to its balance sheet....the fact that wound up banks havent any cash left to pay the creditors shows the balance sheets are a lie.

Next line, banks lend out the cash they have borrowed from depositors and others....fractional reserve is the mechanism by which they determine how much of the liquid asset they can lend...so yes, it is the cause of failure when people want their money back outside of the statistical model provided by fractional reserve.

My argument about your line three, is that there shouldnt be a depositor ( innocent party) bail in...In the strict view of the Austrian, the depositor should lose out as an example to others, but to be fair, we are told that banks are 100% safe, they advertise it, they build buildings to emphasize it, and they couch simple "products" in jargon to exclude simple people from the reality...fractional reserve is one such term.

Edited by Bloo Loo

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No bank should be insolvent according to its balance sheet....the fact that wound up banks havent any cash left to pay the creditors shows the balance sheets are a lie.

Next line, banks lend out the cash they have borrowed from depositors and others....fractional reserve is the mechanism by which they determine how much of the liquid asset they can lend...so yes, it is the cause of failure when people want their money back outside of the statistical model provided by fractional reserve.

My argument about your line three, is that there shouldnt be a depositor ( innocent party) bail in...In the strict view of the Austrian, the depositor should lose out as an example to others, but to be fair, we are told that banks are 100% safe, they advertise it, they build buildings to emphasize it, and they couch simple "products" in jargon to exclude simple people from the reality...fractional reserve is one such term.

Northern Rock is paying back all creditors in full. Of course, no bank has the money to pay all on-demand creditors back at the same time. The reason is is that they lend money to borrowers.

Yes, the system is based on fractional reserve banking, but that is not strictly relevant. If Tom lends me his car and I then lend it to Dave, who goes on holiday in it, I will not be able to give Tom his car back if he asks for it.

I sympathize with your final point. However, we now have a guaranteed £85,000 depositor protection in place, so anyone with sums greater than that in the bank is taking a risk. However, 100% depositor guarantees would also cause moral hazard.

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So what would have happened if we had closed down the banks?

All the bond holders and share holders would have lost all their money. Then we could have started new banks.

The new banks may as well take over the old banks property already got safety glass, safes and alarm systems.

They may as well employ the old staff already trained up know what they are doing.

May as well keep the old name save a fortune on stationary.

All they would have to do then is persuade the share holders and bond holder to put their money into this new venture. Maybe if we told them they were just unlucky last time they would agree.

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Ok, we let NR fail...the depositors lost their money.

The bank is closed, the benefits the staff accrued are lost...Shareholders and pensioners lose out. Baldy MD doesnt get £300K in pension, all the jobs are gone...Bankers are on JSA.

People argue it is Depositors that are bailed out in the way we have been bailing...

OK. Lets consider the closing of the bank from the depositors point of view...their "asset" ( savings held at the bank) is the banks "liability" and therefore worthless to the bank, and good to get rid of as we have seen in the recent "bail ins".

What if, they had closed NR....as it stands, the depositors would have lost x thousands in spendable cash...amounting to billions now unable to be spent in the economy.....bad for GDP.

But lets suppose they had closed the bank and told depositors to put their savings in another bank by writing a NR cheque...and supplied the target banks with 10% in capital to cover the new liability.....sure the bank would have the new liability, but its reserve ratio ( assume its 10%) is unmolested....the saver keeps his spending power and its only cost 10% in printing, which of course is more than balanced by the wipeout of capital at the NR failed bank.

Im not talking QE, just the simple credit to the target bank of funds for free...real printing.

Would this work in the case of the TBTFs? and does it do away with Moral hazard, QE and its accompanying inflation?.

Think Denninger has implied similar.

But then the objective of course isnt to find 'a solution', its to preserve the status quo.

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No bank should be insolvent according to its balance sheet....the fact that wound up banks havent any cash left to pay the creditors shows the balance sheets are a lie.

Next line, banks lend out the cash they have borrowed from depositors and others....fractional reserve is the mechanism by which they determine how much of the liquid asset they can lend...so yes, it is the cause of failure when people want their money back outside of the statistical model provided by fractional reserve.

My argument about your line three, is that there shouldnt be a depositor ( innocent party) bail in...In the strict view of the Austrian, the depositor should lose out as an example to others, but to be fair, we are told that banks are 100% safe, they advertise it, they build buildings to emphasize it, and they couch simple "products" in jargon to exclude simple people from the reality...fractional reserve is one such term.

Banks estimate their need for reserves on a forward basis then seek to secure these on the wholesale market. Should they fail to do so then technically they can become insolvent. They are then obliged to turn to the central bank as lender of last resort. What happened in 2007/8 was a systemic failure. Your suggestion that NR should have been wound up and its deposit accounts secured with another bank would simply have rewarded a different set of crooks.

Depositors are creditors not innocent parties but I agree that creditor risk is never explicitly declared and it should be.

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