Our Politico Story on How the Switzerland and the UK Best the US on Tackling the Too Big to Fail Problem

We have our first story in Politico, which I hope you’ll read here and I hope you’ll circulate it too. Dave Dayen was kind enough to tweet it.

Having said that, I’m really distressed about the headline, which badly misrepresents the article. The author (and most of the time the editor) does not control the headlines. As you can see, the piece nowhere says anyone has solved the too big to fail problem, nor does it discuss what “Europe” has done. As regular readers know well, Europe in general is behind the US in cleaning up its banks on any level: increasing capital levels, having meaningful stress tests (even the US exercise has more teeth than the European version). And its bail in scheme, fondness for CoCo bonds (contingent capital) and lack of Eurozone-wide deposit insurance increase rather than reduce the odds of bank runs.

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  1. vlade

    I’d actually split it three ways – UK, Europe, and US.
    I believe UK is the furthest along (which doesn’t mean it solved it), mostly because even King was in favour, and BoE has still people like Haldane. It still has problems with the likes of HSBC and StandardChartered, but a lot o the problems there are of a slightly different sort (=corruption in their offshore offices.)

    Europe has some better regs, but its banks are a much worse mess. Swiss are the outstanding bit there though, on their own i’d say they are actually even better than the UK.

    US regulation is the worst mess, but on the other side, they managed to clean up the banks, so if another crisis strikes right now, they may actually fare better than most of the European banks.

  2. notabanker

    Good article Yves.
    One must appreciate the UK regulatory perspective that the crisis was caused by the Americans. They are kicking themselves for allowing their banks to get pulled into it. Also underappreciated is the fact that a large burden in unwinding the Lehman’s bankruptcy fell on the UK regulators as much of their cash was domiciled in the UK.
    Structural Reform is not being approached as a 10,000 page paper exercise on what ifs. It is resulting in actual organizational restructuring and ring fencing of assets. It remains to be seen exactly what is finally implemented in 2019, but the tone so far is that the regulators are serious about meaningful reform.

    1. JustAnObserver

      The perspective that “the crisis was caused by the Americans” arrived very early and lead to the UK gov effectively rejecting Barclay’s attempt to acquire the steaming pile of toxic sludge known as Lehman in the week before it went belly up. I say effectively since all they – Darling/Brown/King – had to do was to refuse to waive the requirement for shareholder approval, which would have taken a min of 3 weeks or so to arrange.

      Leading, of course, to Hank Paulson’s famous “perfidious Albion” hissy fit.

      Its also interesting that the creditors of Lehman’s UK operations were, IIRC from an interview with the lead administrator, paid back in full.

    2. Knute Rife

      The UK regulators also had impressed upon them just what sort of strangers they had let into their house with the Irish and Icelandic banks, exposing the entire UK system to a pair of lenders of last resort that couldn’t come close to covering.

  3. rusti

    UBS tried to domicile its investment banking operations in another country, only to find that none with a credible banking regulator (meaning an adequate too-big-to-fail backstop) would have them.

    Pardon the dumb question, but what is the downside for UBS if they chose a country without a credible banking regulator?

    1. Yves Smith Post author

      Thanks for asking, and I should have spelled that out in the article.

      Counterparties would want bigger haircuts on repo and derivatives transactions, which is tantamount to charging more. That would make UBS less competitive in its trading businesses.

      1. vlade

        indeed. their official ratings would also likely go down, meaning higher debt costs (which also ties to what you are saying a bi, although more from the fva than cva side). more suspicious regulators in countries where there re branches

        tbh, cs was alreday reg-shopping, as a large part of their derv business was incorported in uk and subject to fsa (now fca). not something that would help them tht much these days, especially if brexit happens (one of the resons why quite a few ibs have subsidary inorporated in the uk and regulated by fca was access to the european market while having a regultor who was not bafin or french. but as i say, even excluding brexit risk, having a more clued up regultor may not always be good for you…)

    2. Clive

      Yves covers the most important aspect to this above but an additional nuance is that for bank auditors, the presence of a credible government backstop which — despite what they may say — will inevitably have to keep a TBTF show on the road in the event of a crisis as a disorderly bankruptcy and ad-hoc resolution would trash the “real” economy, is an factor which positively affects their audit opinions.

      If a supermarket chain goes BK, then worse-case is that you might have to go to another supermarket. If a mega-bank fails, you’ve (potentially) no access to you money and you can’t buy food anywhere. This is such a blinding obvious consideration, to pretend otherwise is dumb and bank auditors can rely on this implicit state guarantee of at least some — if not all — bank operations. But the trick only works if the state is sufficiently credible as the lender of last resort.

      This really is unfortunately a tediously worded wishy-washy load of waffle but it does address (para. 141 onwards) this subject quite well.

      The list of credible states which could make a claim to being able to back-stop a typical TBTF is not a long one. I’d say it’s just down to the following:

      + The US (lucky you)
      + The UK (lucky me)
      + France
      + Germany
      + Japan
      + Saudi Arabia and maybe Qatar plus possibly Norway due to significant sovereign wealth funds
      + Possibly China but it is doubtful and they wouldn’t be interested without significant concessions plus it would pee the US off mightily

      I may have omitted a couple but I can’t think of any.

      1. Ulysses

        Good point. People, in countries like Italy and Greece, are really at the mercy of the banksters from the countries that you mention wanting them to survive.

  4. Steve H.

    A tangential point here, an important aspect of this and other articles is that it names people with a decent moral compass and the will to exercise it. This is a multiple goodness. It serves to give indication and hope that the polifinancial system is not purely malignant. While some feel that it is a mistake to turn people into heroes, we have proven that we are inspired (to good or ill) by individuals, whom we call leaders.

    A further reflection is on the veracity of the source. There is an analogy to sources about health. The list of conditions is constantly expanding, and the problems that may be found is near-infinite due to interaction effects amongst causal factors. For example, there’s smoking and there’s drinking, and there’s smoking And drinking. However, solutions are often simple because they’re fundamental.

    Listing only the bads is a protocol of the Department of Fear. The snake oil coating comes when the solution is single-sourced to the self. “Your life is doomed to horror, but Dr. Wiz’s MultiPro Extract will fix you up!” Compare to “The best thing you can do is get some sun when it’s high in the sky, that’s free and quick. I’ve got a product, but here’s what to look for if you don’t get mine.”

    So keep naming those fighting the good fight. You don’t form a shield wall by shanking who is standing next to you, even if your positions are not exactly the same. And if you all stand in the sun, you can reflect the light off your shields and illuminate the shadowed places.

  5. flora

    Great article. Interesting that it appears in Politico, a newspaper that to me seems mildly conservative status-quo.

  6. ekstase

    “The British regulators were less generous to banks during their rescues than ours were. Banks that received bailouts were barred from paying directors bonuses ”

    Boy, just this would go a long way toward restoring confidence among the American public.

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