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What price a banking guarantee?
Posted: 24 February 2014 08:16:36(UTC)

Joined: 18/02/2013(UTC)
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In case you missed it there’s been a G20 finance ministers meeting in Sydney. Business Insider have this interesting article about banks, quoting an interview with Mark Carney:

The True Cost Of Supporting Banks That Are Too Big To Fail

Discussing the move toward bond holders being bailed in, debt converts to equity or they take a loss on the debt, which many banks have resisted, Carney told the AFR:

“There’s a process that’s under way right now to answer that precise question, so we will work together and figure out the answer for that. And that’s one of the things that we have to come back to Brisbane with.

Banks went into the financial crisis carrying de minimis levels of capital – for example, less than 2 percentage points relative to their risk-weighted assets, let alone their actual assets. They carried basically no liquidity protection and they were reliant on the state to insure.

The consequence was that we had a crisis where even countries that did the right thing in advance, such as my native Canada and here in Australia, had to take extraordinary measures to support the banks.

We can’t have a system – and G20 leaders have made that clear here – we can’t have a system where some of those institutions that are pushing back on this are still reliant ultimately on the state and are getting a massive subsidy from the taxpayer.”

“If you look at a major mining company in Australia or around the world they will run with let’s say 50 per cent equity to total capital. It depends slightly on the industry, slightly on where they are in the cycle, but let’s say the average leverage ratio is two to one. The leverage ratio for banks, this ‘big blunt horrible blunt instrument’, is 33 to one.”

The article goes on about what the guarantee costs Australia: “If that’s right then $11.1 billion is a whopping subsidy from taxpayers to the big banks per annum.”

So things may be moving slowly but there’s change afoot.
Posted: 25 February 2014 02:14:40(UTC)

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Excellent interview with Mark Carney from our lovely Ticky Fullerton on ABC's The Business program here:

P.S. Could someone please let me know if you can see this video in the UK or whether there's a regional block?
Posted: 25 February 2014 08:27:01(UTC)

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Yes I can see the video. Carney has to be one of the most personable central bankers ever, but that should not cloud our judgment.. . .
Posted: 25 February 2014 09:38:51(UTC)

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Thank you, Micawber. Yes, he’s very much a smooth operator (especially compared to Mervyn) but, you’re right, it’s all about performance in his game, not presentation skills.
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