Banking Explained – Money and Credit

Banks are a riddle wrapped up in an enigma. We all kind of know that they do stuff with money we don’t understand, while the last crisis left a feeling of deep mistrust and confusion. We try to shed a bit of light onto the banking system. Why were banks invented, why did they cause the last crisis and are there alternatives?

Who benefits from the implicit subsidy to ‘too big to fail’ banks?

From Bank Underground –
“Governments have often supported troubled banks whose failure would damage the wider economy. The expectation of such bailouts amounts to free insurance for those who have lent money to these ‘too big to fail’ (TBTF) banks. This amounts to an ‘implicit subsidy’ from the government, with a value that may be as large as £100bn. But where does this money go? We think most of the benefit goes to those who own or work for banks. But verifying this empirically is a challenge requiring further research.”

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Regulators Want Banks to Rescue Themselves Next Time

From Bloomberg View

“I suppose we should talk about the Financial Stability Board's new global anti-too-big-to-fail proposal? Here it is. The basic theory makes sense. You have a bank. A bank is a collection of probabilities. You can estimate how much its assets are worth. But the assets may be worth much more, or much less, than you think.1

People have claims on the bank's assets. If the assets are worth less than you think, then those claims are worth less than you think. Some of those claims are Important: It would be Bad, for the world, for some definition of the world, if those claims were worth less than you think. Bank deposits are, classically, Important; so are other bank liabilities that are necessary for the functioning of markets and the monetary system. There are various ways to guarantee against those claims being impaired when the bank loses money. One is, if the Important claims are impaired, the government will just step in and make the Important claimants whole. This is called a "bailout," more or less, and is widely perceived as Bad.”

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