Why are banks still being bailed out in 2016?

One of the features of the early stages of the credit crunch was the various bank bailouts around the world. We then got another wave as the Euro area crisis hit home. However we were then told we would be advancing into a new era except they have never really gone away. For example in my country the UK there was promises that a profit would be made and that there would be bank reform to stop this happening again. Instead we find that the reform is always being watered down and is also always just around the corner. As to a profit well Royal Bank of Scotland cost around £5 per share to the UK taxpayer compared to the current share price of £2.27 which is quite an achievement when you consider that the FTSE 100 equity index is within striking distance of 7000.

Ukraine

We have seen another example of how the “precious” is always protected this morning already from Ukraine. From the National Bank of Ukraine.

At its meeting held on 18 December 2016, the Cabinet of Ministers of Ukraine approved a decision on state participation in the recapitalization of PrivatBank PJSC. In accordance with this decision, 100% of the bank’s shares will be held by the state represented by the Ministry of Finance of Ukraine. This move will ensure the security of funds and savings deposits placed with this Bank, help avert systemic risks to the banking system and will pave the way for preserving financial stability in the country.

 

This decision will enable the protection of over 20 million Ukrainian citizens that use services provided by this Bank and hold their funds there. I primarily refer to 3.2 million pensioners and 1.6 million socially vulnerable households. They all will have unrestricted access to their accounts.

Okay we learn something of the scale of PrivatBanks operations from that but later in the statement it is rammed home.

Given the systemic importance of the country’s largest bank, it was decided to transfer PrivatBank PJSC under control of the state.

So it was TBTF or Too Big To Fail something which was supposed to have been eliminated.as Reuters points out.

Under Western-backed banking reforms, Ukraine is meant to shut lenders that cannot meet capitalization targets, but PrivatBank is considered too big to fail.

Some more details on the back story are given here.

The state was forced to assume responsibility for the future fate of PrivatBank PJSC and its customers to prevent it from sinking into a deeper crisis. Unfortunately, the problems faced by the Bank, which have been accumulated over many years, have recently deteriorated . These problems were mainly caused by imprudent lending policy pursued by the Bank, which led to capital losses.

All rather familiar isn’t it?

Tell me lies tell me sweet little lies

That line from Fleetwood Mac comes to mind as I note that these sort of rescues are associated with if we are polite continual misrepresentation and dissembling. Only last Wednesday PrivatBank released this.

According to the bank’s press-service, in Ukraine today there is no legal concept and legal way “nationalization” of a stable running of the bank, which demonstrates the blatant “feykovye” (fakeness) relevant information distributed among the bank’s customers via SMS, instant messenger, phone calls business call centers and private media.

Of course an official denial would have put followers of my writings on immediate red alert and it took less than a week! Sadly history tells us that we can expect more of the same going forwards. Specifically we will be told the truth but in “bite-sized chunks” every now and then as that has been the pattern of not only the credit crunch era but bank bailouts from time immemorial.  The situation of this bank previously being under the control of oligarchs makes me fear that this may be worse than usual. This from Reuters poses all sorts of questions.

97 percent of its corporate loans had gone to companies linked to the bank’s shareholders.

What could go wrong?

Before we move on let me present some humour from the PrivatBank statement.

PrivatBank according to the results in 2016 ranked among the world’s best banks in The Banker’s Bank of the Year Awards in 2016 and recognized in Ukraine Bank of the Year.

Sometimes you really could not make it up.

Economic Context

Ukraine has been in the midst of an economic crisis mostly caused by the struggle with Russia which amongst other things has annexed the Crimea. Having had lunch yesterday with my mum in a pub named after the battle of Alma the only good think I can say about it is that the UK is not involved in this particular Crimean conflict. But the economy of Ukraine has been hit hard as the  World Bank reminded us in September.

The economy grew by 0.8 percent in the first half of 2016, compared to a contraction of 16 percent in the first half of 2015…….

Inflation peaked at 43.3 percent at the end of 2015 due to the considerable depreciation of the Hryvnia in 2014-2015.

As a result, real wages were down by 13 percent y/y in December 2015.

Even worse these numbers were on the back of previous economic difficulties as I pointed out on August 19th last year.

The GDP per Capita in Ukraine is equivalent to 16 percent of the world’s average. GDP per capita in Ukraine averaged 1866.79 USD from 1987 until 2014, reaching an all time high of 2826.10 USD in 1989

As you can see unlike many countries which broke away from Soviet Russia Ukraine struggled economically. There was another problem which was always going to cause trouble.

the US Dollar is a type of ersatz currency in Ukraine

Accordingly the strong US Dollar which has in fact pretty much coincided with the crisis in Ukraine must have caused all sorts of economic and banking problems.

But we move on with the background that the US $5.5 billion for this bailout is a lot of money for the Ukraine as for example it is more than a third of the IMF program.

Timing

The European Investment Bank has chosen an interesting day to be plugging this theme!

New rail tunnel is the first of €3bln wave of finance and reflects boost in EU ties ……..How many projects have we financed in ? Which sectors have already benefited from an EIB loan? Find out here

Italy and Monte Paschi

We arrive here from two sources of news. Firstly if you look at the main Investor Relations page for PrivatBank you are told it has subsidiaries in Latvia,Portugal, Cyprus and Italy. Of course it has I hear you thinking! Actually the Italian subsidiary appears to be going through a liquidation process. This must be somewhat of a distraction for the Bank of Italy as it mulls this and limbers up in case it is needed. From Bloomberg.

Banca Monte dei Paschi di Siena SpA will begin taking orders for shares Monday as it aims to complete raising 5 billion euros ($5.2 billion) by the end of the year to avoid a rescue by the Italian government.

I have two main thoughts for you. The timing is significant as it will allow the Italian authorities to bail it in or out over the holidays. Although of course the holiday feeling went very wrong for the Bank of Portugal when it tried some financial engineering with Novo Banco. Also we have the issue of what has happened if this goes through as in better pre Italian referendum days only about 1 billion Euros was offered.

Comment

There is something of an irony here as I think it would be sensible for my country to fully nationalise RBS. This is not because I am a fan of such things but simply that it would be a more honest reflection on where we stand. However some 9 years after all this began it is a sorry tale that we see banks still being nationalised and others seemingly on the verge of it. Meanwhile the reform rhetoric bumbles on and employs quite a few bureaucrats and establishment barnacles on its way.

Meanwhile I note that as part of its reform program the IMF is on well trod ground for it as it criticises the pension scheme in Ukraine. This made me wonder if anyone has researched the IMF pension entitlements?

Links

Here is a link to my August 19th 2015 analysis of Ukraine

https://notayesmanseconomics.wordpress.com/2015/08/19/ukraine-and-its-economy-is-being-buffeted-by-the-currency-wars-and-china-contagion/

 

 

 

 

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29 thoughts on “Why are banks still being bailed out in 2016?

  1. I can only say read John Kay’s excellent book “Other People’s Money”. He points out that until the 1980s banking was considered too complex to put into GDP stats. This whole thing smacks of deep corruption (just as with the Irish banks) that is too “soft” to be the subject of prosecutions, and as ever, the participants walk away with the dosh and the taxpayer is stuck with the problem. And they wonder why we have populism?

  2. Hello Shaun,

    You ask Why ?

    because the result of kicking the Kan down the road is that eventually you catch up with it !

    The reality is that the TBTF Banks went bust in 2008 and nothing has changed since, no laws , nothing

    nobody was prosecuted in the CEO circles for the fraud that caused that crisis

    (well not here , Iceland did but they’re in the dog house for that )

    the politicians are not going to let go of the gravy train – they have future jobs in the banking sector .

    In short the Banks own them , and us

    Forbin

    tricksy banksyes

    • Hi Forbin

      Yes the tale goes on and on and looks as though it is developing further tonight.

      “@lemasabachthani
      ITALY CABINET SEEKS APPROVAL FROM PARLIAMENT TO INCREASE DEBT BY UP TO 20 BLN EUROS TO COVER BANK RESCUES”

      Something Finance Minister Padoan has denied time and time again. Also Mario Draghi may have to stop calling the Italian banks “resilient”.

    • “nobody was prosecuted in the CEO circles for the fraud that caused that crisis”

      Why do people persist in talking about THE CURRENT AND ONGOING FINANCIAL CRISIS WHICH BEGAN IN 2008 as if it’s over and we are now in an OK/new crisis time?

      • Ah ah! JB, That’s because the “emergency” is over and we are now in a post-crisis new-normal era of low rates (and low everything else- except debt).

        Meanwhile – back at the Fil Rouge – If only the MPC could get the base rate back up to the emergency level sooner than markets expect.

        I despair.

    • nice distraction though , wasnt it ?

      I mean what use is the little fiver these days , wasnt their talk of making it a coin ?

      I’d posit PPI was the helicopter money

      soon to be followed by Pensions scandal payouts…..

      crazy times

      Forbin

  3. Great blog as always, Shaun. British politics professor Richard Sakwa, in his book “Frontline Ukraine” (p.65-6) notes that: “Igor Kolomoisky is the latest manifestation of the ‘Dnepropetrovsk [Dnipropetrovsk] clan’, although in a radically new form…Kolomoisky’s giant financial-industrial group ‘Privat’ grew out of his ‘PrivatBank’, established in 1992, and now encompasses some 100 enterprises in Ukraine and the CIS. His conglomerate covers some of the core parts of the economy, including metallurgy, machine-building, oil extraction and chemicals. He has extensive media holdings, including the largest Ukrainian media group, ‘1+1 Media’ and the news agency Unian, as well as various internet sites that served to moibilise Ukrainian public opinion to serve his causes, including the demonization of Yanukovych and Putin.” Kolomoisky bankrolled the Maidan demonstrations that led to the overthrow of President Viktor Yanukovych. He picked up a lot of the business assets of the Yanukovych family after the change in regime. He was appointed governor of Dnipropetrovsk oblast by the provisional government, which gave him further opportunities to expand his industrial empire. Kolomoisky has sponsored volunteer brigades to fight for the Ukrainian government in the Donbas. So it is not surprising that the Ukrainian government wouldn’t let his bank fail.
    The State Statistical Service of Ukraine was supposed to start publishing its own Harmonised Index of Consumer Prices (HICP) following Eurostat guidelines with the January 2017 CPI update according to a June 2015 EU mission report by David Fenwick. I could find nothing more recent in English about this on the web so I hope that this is still on track. It is a pity that Russia and Belarus do not have their own HICPs.

    • Hi JW

      Yes the Williams & Glyn sale is something else that is always just around the corner isn’t it? For those who have not followed this RBS was told by the European Commission to spin off some of its business and resurrected an old brand name to do it.

      Maybe they are hoping that if they stall long enough the UK will be out of the EU..

  4. Hi Shaun
    On the day that Lagarde was
    found guilty but unlikely to lose her IMF job
    how can we be anything else but angry.
    Like you I hate the thought of
    nationalising RBS but I hope that some
    semblance of sanity would apply on how
    it should be run, such as accountability and
    wage and bonus structure.

    JRH

    • JRH, you answer the question posed by Shaun as his header;
      The reason we are still bailing out the banks in 2016 is because there is no democratic accountability.
      Further, with the public investments in RBS and LBG, with quangos like BoE MPC, the govt. has actively SHUNNED democratic accountability.
      What caused Trump? Not fake news, not Russia, not the electoral college, IT WAS THE ESTABLISHMENT!

      • maybe, but you thought Thatcher was bad, but Trump is singing ‘You just ain’t seen anything yet’ and is going to be 10 times worse than thatcher …

      • Democracy has nothing to do with it. In a NON DEMOCRACY (Dictatorship where the Dictator dictates that logical sensible business practice should be followed) which uses normal business practice, the ailing bank(s) would simply go out of business and into liquidation with no help whatsoever from democracy.

  5. i can understand why it may be the best course of action to bail out a bank but only if the bankers that got it into the mess in the first place are punished financially or, where criminal activity has taken place, jailed for a substantial period ‘to discourage others’. what I cannot accept is that so many walk away from the mess they have created without any fear of losing their ill gotten gains.

  6. In a corrupt state, the politicians will bail out a bank when they can line their pockets surrepticiously in exchange for the state bailout funds.

    In the case of KCB, I heard the owner had loaned the politicians money, and thought he had power over them. The politicians decided otherwise, and once KCB was insolvent it’s owner was not able to call in the loans.

  7. Hi Shaun, Very depressing reading – thanks. Not only is this visible mess 9 years old it shows no signs of ending. At the current rate of progress in cleaning up the mess it could take decades. The crisis caused the BoE to embark on ultra-loose monetary policies which also show no signs of ending. Far from containing the damage to the banks it spread to the economy leading to low growth, high household debt etc etc… and subsequently a “peasants’ revolt” in June. What a long sorry tale.

    As Steve Jobs famously remarked at Stanford – “you can only connect the dots looking backwards ….. it was very clear looking backwards 10 years later.”

  8. Hi Shaun, There is one sentence from Ukraine that sounds worringly achieveable in the next phase of our continuing crisis “They will all have unrestricted access to their accounts”. Just imagine the unreliable boyfriend whining behind a storyline that includes saving the worlds poor whilst securing Britiah OAP’s current accounts. This theatre will mask the necessary nationalisation of UK clearing banks and the following that Govt. oversight of all money transfers made in the UK that exceed £500.

    Shall we see how far we all get in 2017… Paul

    • Hi Paul

      Your last sentence reminds of the pictures I saw from India earlier of queues for banks still going around the block as the demonetisation saga goes on and on. Not much “unrestricted access to their accounts” is to be seen there!

  9. Hello Shaun,

    – “Actually the Italian subsidiary appears to be going through a liquidation process. This must be somewhat of a distraction for the Bank of Italy…” No distraction for BankofItaly, It stopped the Privat Bank banking license on august 2016 : https://www.bancaditalia.it/media/comunicati/documenti/2016-02/cs_Privatbank_09082016.pdf

    – on some troubled italian banks my opinion is that we are on the final stage for the stabilization of the situation. 20 bn euro one-off are “little” amount compared to other banking bail out accomplished around Europe and other parts of the world. We will see…

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