In bank crisis, caution better than cure

Over the weekend, finance chiefs from the Group of 20 (G20) industrialised and developing countries meeting in Paris endorsed a 1 to 2.5 per cent capital surcharge to be phased in from 2016.

The aim of the extra capital surcharge is to ensure that banks have sufficient capital to withstand market turbulence so that taxpayers would not have to rescue them again in the next financial crisis.

SCMP, Oct 17

But why rescue them at all? I sympathise with the Occupy Wall Street protesters on this score. I only wish these people would instead start up an Occupy Washington movement to recognise that the bigger fault lies with politicians.

Of course, the politicians would tell us they acted responsibly. If they had not intervened, we are told, the world's financial system would have failed and we would be back in animal skins trading handfuls of rice for polished seashells.

I don't buy it. I'm not saying it can't happen - and if these government bank rescues continue, there is a good chance it will happen - but the resilience of any market-based financial system to an ordinary financial crisis is much greater than politicians realise. It is my belief that, left alone, several more American and European commercial banks would have suffered thunderous failures.

Their shareholders would have been left with nothing, their directors shamed into exile and perhaps even their depositors left with only cents on the dollar. But someone would have picked them up in the end. The pit may feel bottomless when you're falling but there always is a bottom - and it's often surprising in finance how quickly you climb out.

Nasty nonetheless, very nasty, but very salutary, too. Afterwards, you think twice about depositing money with a bank just because its ATM is nearest your home or it pays a slightly higher rate on term deposits. You want some real assurance. For instance, you begin to look with favour on the sort of glorified pawn shop that we call a bank in this town.

Yes, there is a reason that Hong Kong's three-month overdue rate on loan interest payments never exceeded 1 per cent of total loans in the latest financial crisis. It is the same reason that construction workers once updated their savings passbooks every pay day.

We maintain a healthy mistrust of financial institutions here. Let them give us any reason to doubt them and we take our money out. Our caution has served us better than any regulatory system ever could.

But what European depositor need worry? In Ireland, a number of developers - who make our own look like angels - talked their bankers into letting them scatter money into any fool project they could think of. When the party ended, the tab was picked up by Irish taxpayers and continental bondholders.

I'm happy to accept that the Irish depositor wasn't directly at fault. All forms of investment, even deposits, must nonetheless carry an element of risk and when governments attempt to remove it, they invite just this sort of debacle.

Just watch. In a few years, it will happen again in Ireland. The Irish depositor was not taught caution, nor the Irish banker the full consequences of rash lending.

Similarly, in Belgium just now, the European authorities are busy bailing out a bank, Dexia, which only came into existence 15 years ago and which tried to make money by the classic high-risk game of borrowing short on the interbank and lending long to its customers.

In Hong Kong, that kind of game would have been spotted quickly. The big boys would have choked off its interbank game before it endangered them and it would have had to survive on money laundering and dodgy cross-border deals.

But in Europe, who cares? The depositors are all fully guaranteed by their governments and they know it, while the directors and executive can find jobs elsewhere or retire on their winnings.

They say bad money drives out good. It can also be true of entire financial systems that are overwhelmed by generalised government bailouts. Bad banks drive out good.

But here we have the politicians gathering in Paris to pretend that the problem was insufficient capital adequacy and that an extra 1 to 2.5 per cent in the capital-to-assets ratio will fix the problem.

Nonsense. The way to fix this problem is a shiver of horror running down depositors' spines: 'Oh, that could have been me. Better watch out.'