When banks think they rule the world

The European Central Bank (ECB) is holding €2 trillion of EU government and bank debt. This portfolio, held at EU taxpayers’ risk, includes a huge amount of Italian bonds through the ECB’s “innovative” policy of Quantative Easing (QE).

QE is just a expression for the ECB supporting EU government budget deficits and  the EU’s banks, many of which have heavy exposures to Italy like Italian, French and German banks.

The EU and the ECB has warned the Italian government about its spending, and the Italian government has criticised the ECB as “poisoning the climate against Rome”.

The president of the ECB has asked politicians to “protect the independence of rate-setters.”

But one should ask the ECB the following questions :

  1. Why QE has been kept running for so long, and why has the ECB has kept rates so low when house prices and share prices in Europe have gone up so much after being fed with almost zero interest rates? The financial crisis ended many years ago and we have seen fairly normal economic growth again!
  2. How do they intend to unwind their massive bond holdings at a loss when rates go higher. 
  3. The ECB could also explain why they have been so generously supporting banks, including perfectly healthy banks, with QE bank bond purchases and with their various bank funding facilities. Good banks do not need this and weak banks should not receive open support from their government nor from the ECB. Weak banks should be closed down if they are not viable, like any other private owned limited liability company. There should not be any concept that banks are “too big to fail”! That is just a weak excuse after the perfectly clear lessons of the Lehman Brothers failure.
  4. There is a myth that banks are needed to support the real economy. In other words banks, central banks and governments claim that they are needed for servicing the payment systems and for financing the investments of the public sector, the primary market resource sector, and the commercial and industrial sectors.

The balance sheets of the biggest commercial banks in the UK and in the Nordic countries do not support this view. It is estimated that the main Nordic banks only use between 15% to 25% of their balance sheets for corporate lending, and even this small share also contains large loans for mergers and acquisitions, not for new investments. The equivalent figure for the UK is said to be below 15%! The largest use of bank balance sheets is for housing loans and similar real estate loans, not for new investments – these account for some 25% to 40% of their balance sheets. The rest of the balance sheets is used for speculation, arbitrage and liquidity.

The public sector and the large companies have easy access to the bond markets and have little need for banks. The payment sector is really a public good and could easily be managed by publicly controlled payment systems. The present monopolies of VISA and MasterCard for retail payments and their high costs clearly shows that the present systems are inefficient and expensive from a consumer’s viewpoint.

Now, let’s examine the financial crisis of 2008. Then the Lehman Brothers failure and its poor management by the Americans led to huge losses through a domino effect around the world. Moral hazard and too big to fail were self evident lessons to be learnt. The American government bailed out AIG, and insurance company, and that saved Goldman Sachs and a few other banks from huge losses. Many, if not all of the largest banks like Citibank,  Chase JP Morgan, Bank of America, and Wells Fargo all received huge support from the government. In the following years these same banks and other big European banks later paid over €180 billion in fines to the governments who claimed that the banks had committed financial crimes and misdemeanours. Many of these same banks paid the fines, but never admitted that they did anything wrong! So much for American justice…

In the last 40 years, Nordic banks have been bailed out by our governments. Regulation and supervision has been improved but the banks have been allowed to grow. In Finland, 3 banks now occupy some 80% of the market with 2 banks, Nordea and OP Group, having over 60% of the market. The third bank, Danske Bank, is facing legal challenges over massive money laundering accusations. Nordea is now also facing similar accusations. In both cases the banks’ senior management has been saying that they had no knowledge of such illegal business, or that it occurred a long time ago! Whatever the case, there can be no doubt that the banks are already too big if senior management can claim that huge profits that were generated from these payment activities went unnoticed! The boards should have been asking questions why were their Baltic operations were so profitable when the total populations of these countries are so small. Then there are the matters of the Panama Papers. Again, the statements from the banks’ spokesmen that  -“we had no knowledge” or “we did nothing illegal” are not exactly convincing when the scale is large and systematic. 

Banks must be held accountable and that is best done by personal fines from the CEO, other senior managers and the board. General fines must be stopped because the €180 billion was not paid for by shareholders it was paid for by you, the customers of these banks! So far not one CEO or Chairman has gone to prison, and few if any have been asked to repay their bonuses.

In this week’s newspaper here in Finland the Chairman of Nordea and his CEO (a former Goldman Sachs’ partner) have been in the headlines with flattering photographs. The CEO has described how Blockchains will change the world of banking, and the Chairman has been boasting how he, as the master of the banking universe, worked closely with Goldman Sachs in 2006 onwards (!) to develop Nordea into the shining bank that it is today!

Let’s put this in perspective – banks do little to produce or manufacture anything solid. They have had a long history of being bailed out by taxpayers this last 50 years. They make outrageous claims about doing “God’s work” (Goldman Sachs again) and they want to be seen as expert commentators on smaller government. The third bank CEO to appear in the headlines of the same Finnish newspaper is from the other big Finnish bank, the OP Group, a local coop bank, who said: “the markets have the role to discipline (bad behaviour)… if politicians cannot do it”. It is worth wondering did he mean by this comment – is he saying that the banks and other big investors will discipline bad behaviour that the government cannot control? 

The history of the last 50 years disproves this remark completely, without government intervention to control the markets, banks would have driven us into the ground more than once.

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