The BIS has released a new comparative study of the impact of the different types of financial sector rescue programmes pursued across countries: you can read it here.
Abstract:
We analyse the wide array of rescue programmes adopted in several countries, following Lehman Brothers’ default in September 2008, in order to support banks and other financial institutions. We first provide an overview of the programmes, comparing their characteristics, magnitudes and participation rates across countries. We then consider the effects of the programmes on banks’ risk and valuation, looking at the behaviour of CDS premia and stock prices. We then proceed to analyse the issuance of government guaranteed bonds by banks, examining their impact on banks’ funding and highlighting undesired effects and distortions. Finally, we briefly review the recent evolution of bank lending to the private sector. We draw policy implications, in particular as regards the way of mitigating the distortions implied by such programmes and the need for an exit strategy.
10 replies on “BIS on Financial Sector Rescue Programmes”
Reading this study brings Tolstoy’s “All happy families resemble one another, but each unhappy family is unhappy in its own way” to mind. And all those in loco parentis seem to be dealing with the different types of unhappiness in their national families in their own way. The unique feature of Ireland’s unhappiness is that, in contrast to all of the other countries surveyed, all of its native banks are technically insolvent. NAMA may then be seen as a quintessentially Irish solution to a uniquely Irish problem.
It removes the loans that threaten insolvency in exchange for bonds with a coupon that will start generating profits immediately. While the ECB continues to be happy to pump liquidity into the banks accepting these bonds as collateral and at extremely low interest cost, the banks’ profitability is assured. The banks, in turn, can continue to buy Government debt and turn over a handsome profit. Using the banks as the prime lender, the Government is shielded from complete reliance on the international bond market and can reduce the scale and relax the pace of the fiscal adjustment. The book of impaired loans can be addressed at leisure (and with maximum discretion) and the land and property used as collateral can be drip-fed onto the market to prevent prices dropping suddenly to economic levels. Some land and property will be extracted to provide the basis for “socially useful” projects. (Most taxpayers tend to maximise the “feel good” value of projects of this nature and to underestimate the present value of the stream of future tax payments – and the value of the service that would otherwise be provided. This is the grey area where politcians thrive – bribing people with their own money and that of future generations.)
In the meantime, taxpayers will be locked in to finance this “resolution scheme”. There will be no attempt to fund an investment stimulus in infrastructure and utilities both to compensate for household and business deleveraging and to boost future economic growth and productivity. The banks will have no interest in, or incentive to, advance credit to hosueholds or businesses expect under tight conditions and at high cost – the alternative of financing the Government will be too easy and profitable. There will be no attempt to tackle the regulatory and competition policy failures that result in the excessively high cost of doing business in Ireland. And the whole exercise is predicated on the hope that Ireland’s trading partners will generate the rising tide that will lift the little Irish boat.
It will take a miracle to avoid the economic death spiral of the 1980s.
from the exec summary
“Subject to these caveats, evidence from aggregate credit data shows that, at the end of 2008 and in early 2009, bank lending to firms and households kept slowing both in the United States and in Europe. Evidence from lending surveys and from loan pricing would suggest that the slowdown reflects both supply and demand factors. Credit conditions may have eased somewhat as of late, after the extreme tensions registered following the Lehman default, in terms of both credit standards and spreads on loans. It is, however, premature to conclude that the credit supply cycle has reached a turning point. ”
From the NAMA FAQ
“The purpose of NAMA is to remove uncertainty about the bank’s balance sheets, clean them up, provide them with an ability to access liquidity and to thereby facilitate the availability of credit to the real economy.”
and the NAMA bill 2(b)vii
“(vii) to facilitate the availability of credit in the financial markets of the State,”
Thoughts on success anyone?
@Paul Hunt
Lovely post.
NAMA creates opportunities for politicians that they lony dreamt of in the hey-day of lottery money.
The Greens, previously the most Puritan of political parties, have taken to the planning possibilities of NAMA like the proverbial sixteen year old discovering fornication.
Whatever our other woes in the ’80s, we had a competitive and expanding traded sector of the economy. That was destroyed from about 2000 by one Bert Ahern bribing us with our own money.
So the tide may rise, but Ahern/McCreevy/Cowen have kicked holes in the Irish boat.
@Brian Lucey
Nice contribution on RTE Radio 1 this morning
While NAMA/recapitalisation etc. may be necessary, they are hardly sufficient to get the banks lending again. This logical difference is glossed over by very many people who should know better.
@Paul Hunt
I have been ranting on this a while but not as eloquently. Question is, will the ECB continue to roll over the funny paper for cash ad infinitum. Some suggestion that the paper will be floating rate with reset every six months.
Why would the bankers bother lending to the natives when they can play the bond markets in a uniquely Irish way with paper issued by nama backed by toxic assets worth far less than the aggregate paper which may not even be counted as national debt.
@podubhlain,
I have no specific inside knowledge on this. All I have picked up, via some sporadic contact with engaged Continentals, is that the Gnomes of Frankfurt (they seem to have moved from Zurich since Harold Wilson’s time) are prepared, with gritted teeth, to do whatever it takes to keep Ireland in the Eurozone. How long this will continue is anyone’s guess, but the political timeframe in Ireland is one month at the time until the 28 months to the next election are clocked up.
@Maurice,
Thank you. Joyce got it in one with “Ireland is the old sow that eats her own farrow”, even if they are as ill-conceived as the rag-bag that NAMA will acquire. While all the attention will be on devouring whatever is deemed “socially”, “environmentally” or “spatially” useful, the rest of the world will pass Ireland by. The MNCs, confronted by excessively high costs and deficiencies in infrastructure and utilities, will vote with their feet – as they are already beginning to do.
@Paul Hunt
The Supreme Court have put off the day of reckoning for a week- will it make any real difference.
The Gnomes may back nama for now but if Merkel is turfed out with her finance minister in the September elections then we better beware.
@Brian Lucey
The section quoted is mere camouflage for the real purpose. They should have
“(vii) to facilitate the hope that availability of credit in the financial markets of the State will resume at some date in the future,”
@Brian Lucey
Interesting summation from Prof. Stiglitz about the US credit markets neatly sums up the experience there. Are we doomed to repeat an obviously flawed strategy?
According to Stiglitz, the main result of the various and sundry bailout programs (both direct and indirect) was to refill the banks’ coffers and reduce competition in the financial sector. That, in turn, has enabled banks to both charge higher rates and reduce their lending activities.
“The recovery will be slower because what’s needed is more lending at more reasonable interest rates,” the economist says. “That increase in lending – to small- and medium-sized businesses – just isn’t there.”
A perfect storm perhaps?
What would be the worst thing that a government could do if facing a world wide depression?
Borrow and defer liquidation of worthless assets that will obscure and prevent genuine business opportunities for the duration. And extend both the depth and duration of the depression. The income disparities that arise will be enormous as befits a banana res publica.