Fixing the Banking System Post author By Iulia Siedschlag Post date October 6, 2009 This article discusses lessons from the nationalisation of Swedish banks in the early 1990s. Categories In Banking Crisis 15 Comments on Fixing the Banking System ← NCC Statement on Energy → Donogh O’Malley’s 1966 Announcement of Free Education: The Hidden History 15 replies on “Fixing the Banking System” I saw a story in the newspaper today about the German Hypo Real Estate bank, the government having bought out 90% of the bank at €1.50 wants to buy out the remaining shares at less than €1.50. Angry scenes over in Germany. While the article focuses on the nationalisation of two Swedish banks it makes the point that nationalisation was not the main way to resolve the banking crisis in 1991-1993. It also adds that given the global financial crisis and global recession the Swedish experience may have limited relevance for the current banking crisis. Iulia, I am going to print the article tomorrow and have a proper read of it. Thanks for the link. Joe Stiglitz on RTE Primetime tonight – not a fan of NAMA. ANy chance he could be persuaded to address the Greens 🙂 Sweden is about to relearn all those lessons again, as Latvia et al fall into revolution and decay. What a bloody mess. There is at least one error in the article. “Securum had privatised all its credit by the late 1990s – much sooner than initially expected.” Securum sold the last 10-20% of its most toxic assets to Venatius, another workout vehicle (for housing associations), at a huge loss to end it’s existence. Venatius took another eight years to work those and its own assets out. http://www.venantius.se/ @Pat Donnelly It does seem to be going pear shaped again. The Swedes seem to be a little bit prepared for it, though: http://www.nakedcapitalism.com/2009/10/sweden-prepares-for-financial-collapse-in-latvia-and-major-bank-losses-at-home.html @Iulia I agree with you that the Swedish solution has only partial relevance, but one thing stands out – the nuanced approach to the banking system. Banks were encouraged to come up with their own solutions with a penalising government backstop for those that couldn’t (nationalisation). 75% of the banking market by assets managed to do this. It is the equivalent in Ireland of only supporting Anglo and INBS by nationalising them and leaving the rest of them to get on with it (within the support of the guarantee). It is also interesting to see the swedish banks now scrambling to raise capital with the fallout from Latvia on the horizon. Why none of our banks have had equity raisings is beyond me… unless they think they are getting a better deal somewhere else. Can we please have some commentary from the ‘Big Dogs’ 🙂 on this article!! Certainly seems like an article the Labour Party’s economic advisors should be reading. @ YM still dont understand AIB or BOI not raising capital yet either. At this stage an equity drop off of 20% seems as likely (if not more so) than another 20% increase. If economic data/forecasts start to turn down on the back of poor-to-middling Q3 earnings reports, its gonna be a much more difficult challenge to get a decent rights issue through. Only thing i can think of is that AIB are preparing to sell the M&T stake behind the scenes as we speak. Suppose they’re also probably waiting for NAMA to be fully passed before hitting investors up, take away any lingering uncertainty. @Eoin The reason the banks have not raised equity yet is that the government has not passed NAMA and despite the Sept 16th announcement the final size of the transfer have not ben decided. What do the banks tell shareholders?-“based on this, we need that no wait it is this or possibly that”. In addition who delivers the message on AIB, Eugene Sheehy? @Eoin “Suppose they’re also probably waiting for NAMA to be fully passed before hitting investors up, take away any lingering uncertainty.” Yeah. They may also be waiting for some guidance from regulators on what the capital standards are going to be – how much, composition, that sort of thing. But I can’t help feeling that they would do better to have a series of smaller recapitalisation rather than a big whallop. I suppose it depends on how militant the existing shareholders are feeling about dilution/ponying up? @ YM hmmm. Depends on ‘where’ the recapitalisation is going to come from – govt stake, rights issue, or asset sales? Existing shareholders would probably prefer the big bang in terms of either a govt stake or a rights issue so they can just get on with it. If it was asset sales i can see only two major assets AIB have to flog – M&T and the Polish operation. BOI have none. Suppose they might be able to flog off individual commercial mortgage exposures they have out, or any property assets they have (ie branches/offices) either here or in the UK. Any of that stuff would obviously take time, and you wouldnt want them to rush them via a fire sale anyway. Can understand them wanting to wait til the regulator provides further clarity, but they know its going to be a lot higher than the existing capital levels (assuming NAMA transfer write downs), so it would only be for the investor roadshow rather than their own financial management that they’re waiting. Other banks are going ahead without that clarity anyway. Good article other than my quibble above. My position remains that nationalisation is not the answer, except maybe to INBS which looks to be hopelessly insolvent. EBS probably only needs a small equity injection (sub 1 bn), AIB and BoI need larger injections, but they have huge opportunities to divest themselves of assets to raise capital – life and pensions, private wealth management etc. never mind AIBs stakes in other banks. And then they can look to raise capital. And then they can look to their bondholders to accept equity for part of their debts. This cranky ranter suspects that bank management know it would be the death of them to do these things (their existing shareholders would call for heads) and they are too cowardly to do it. What is going to cure the banks in the long run is higher margins, better quality loans (proper LTV – cash up front), and a writing down of bad loans/pursuit of defaulting loan collateral (basically cleaning up their balance sheets over time). @Eoin The banks have plenty of assets – as I say, the Life and Pension businesses, private wealth management, commercial banking services, foreign businesses/branch networks, etc. The big two need to deleverage, which will result in smaller banks at the end of the process. @Eoin “Can understand them wanting to wait til the regulator provides further clarity, but they know its going to be a lot higher than the existing capital levels (assuming NAMA transfer write downs), so it would only be for the investor roadshow rather than their own financial management that they’re waiting. Other banks are going ahead without that clarity anyway.” I see the boss of HSBC saying that 10% Tier 1 is the new norm. Has anyone worked out what effect this would have on AIB/BOI? How could they do a rights issue given the highly uncertain value of their assets? Hope the directors have good PI insurance. Comments are closed.