28-Dec-16 World View -- Bank run worsens Italy's banking crisis / Sao Tome and Principe switches allegiance to China

[John]

28-Dec-16 World View -- Bank run worsens Italy's banking crisis


Following the money, Sao Tome and Principe switches allegiance from Taiwan to China

** 28-Dec-16 World View -- Bank run worsens Italy's banking crisis
** http://www.generationaldynamics.com/pg/ ... tm#e161228



Contents:
Bank run worsens Italy's banking crisis
Following the money, Sao Tome and Principe switches allegiance from Taiwan to China


Keys:
Generational Dynamics, Italy, Banco Monte dei Paschi di Siena, MPS,
European Central Bank, ECB, Jens Weidmann, Deutsche Bundesbank,
China, Taiwan, Tsai Ing-wen, One-China policy,
Sao Tome and Principe, The Gambia, Malawi, Senegal,
Russia, Georgia, South Ossetia, Abkhazia, Tuvalu

[Guest]

Regarding the latest GD update "Bank run worsens Italy's banking crisis" ... Let's crunch some math re the MPS bank.

Three weeks ago they had enough funds to "stay afloat" for 11 months, but just two weeks later (last week) they only had enough funds to last 4 months. It ran through 7 months worth of funds (at the recent historical rate of funds dissipation) in just 2 weeks, or call it slightly less than half a month. So that implies that the current (i.e., instantaneous) rate of eating up its funds (e.g., liquidity loss) is 7 divided by one-half (minus a bit) equals 15 times higher liquidity consumption currently than the recent (say, 6-month moving average) historical bank-run rate. Italians are making a run on the MPS bank at least 15 times more severe right now than in recent history (which might already have been bad). And, of course, it could get worse ... the bank run rate could accelerate even further if confidence in the feasibility of any solution continues to wane.

Let's look at it from a different perspective from the data in the paragraph following the quote. They had estimated the immediate bailout needs at 5 B euros. Obviously this was short sighted, probably in the sense that they only figured in the required loan payments, but did not add a factor to account for a bank run by the public (which, by the way, is so stupid that you have to say that the people trying to do the bailout are equally stupid as the people who got them into the bailout crisis to begin with). But a bank run, there was, specifically to the tune of about 3.8 B euros (new bailout estimate of 8.8 B euros minus old bailout estimate of 5 B euros) during a period of 3 weeks in the beginning of December (the most recent data available). This gives us a current quantitative estimate on the magnitude of the bank run, namely 3.8 B euros per 3 weeks, or about 1.25 B euros per week, or about 5.5 B euros per month. That's a lot of freakin' Lira.

That, plus the prior computation about the recent increase in bank-run rate, implies that although the instantaneous bank-run rate is 5.5 B euros per month, this recently got 15x worse than the 6-month-ago scenario, which implies that at that time the bank-run rate must have been 5.5/15 = about 367 M euros per month. But, if Italian perception is that this whole thing is going south, and (as is conjectured) the citizen-customer bond investors are being set-up (by EU legal constraints that paint them into a corner) to take a haircut on their life savings expressed in MPS bonds, so that it's advantageous (out of self-interest) to cash in their investment while they can, that could easily cause another order-of-magnitude increase in the instantaneous bank-run rate - in other words, possibly taking it from the current 5.5 B euros per month to 11 B euros per month, or potentially even higher.

At that rate, the 55 B euros of bad loans pales in comparison to the 66 B bank run on MPS that we can expect during the next six months.

Taking a step back (or a step up to a higher altitude from which we can get a better perspective), what does all this tell us in terms of either general principles or advice for immediate action? Well, as far as general principles go, one could conclude that any bank with a large figure X of bad loans on the books, ought to have at least X cash (or liquid short-term assets) on hand to handle the inevitable bank run that is bound to occur, regardless of any well-intention-ed international efforts to bail out the bank from its ill-advised situation. Perhaps even more than X. Maybe we could formulate the general principle that a bank ought to have on-hand (in liquid or short-term assets) 2X, that is, two times the amount of its non-performing loans.

So here's a good related question. How much liquid funds did American banks have on hand during 2007-2008 when they had to be bailed out by the U.S. government? Did they have 2X their bad loans in liquid funds? I doubt it very much. This is the same old problem, different day, different country.

A related question is, what are the the U.S. government mandated minimal liquidity requirements for banks, currently (if there indeed are any)? That's a research question, but hopefully we have since then put some sensible banking requirements into effect. [And if not, then Trump better get busy on this.] Also, should such minimal liquidity requirements be specified in terms of a percentage of total loans on book, or as a percentage (like 200%, say) of under-performing loans? I suggest that what is needed is a minimal liquidity requirement specified as a hybrid of those two. Something like, liquidity must be >= 10% of performant loans plus 100% of non-performant loans.

With regard to best present choice from among feasible actions intended to help bail out the MPS bank, the following seems to be the best, albeit ugly, choice (if one is in a mood for charity, anyway). Give them about 55 B euros as a grant, plus loan them another 66 B euros at zero interest. Of that, the first part is to be used to completely write off the bad loans. The second part is to be used as a buffer to weather up to 6 months of bank run at about 11 B euros of bank-run-per-month. Per the latter, Italians will hopefully see that the bank will not run out of money anytime soon. Per the former, Italians will see that the crisis has actually been solved, not just kicked down the road (which is all that has been done thus far). That by itself should be sufficient to slow down and eventually stifle the bank run. When you think about it, let's (via a huge leap of faith) assume that a given bank (let's make it a fake bank with a problem similar to MPS, just to make it non-specific) had X amount of bad loans on book, but prudently also had 2X liquid funds to insure against any bank run - and under this somewhat idealist situation, since you have 2X liquid and only X bad loans, your best choice of action is to use half of your 2X liquidity to wipe out your X bad loans, taking a one-time write-off of X (with maybe a tax savings) - and by so doing, solving the problem, and not having to dip into your remaining X of liquidity to fight a bank run. The problem, of course, is that virtually no banks do this, preferring to minimize their liquidity and maximize their (most profitable but most risky) investments.

A final suggestion (back to the very real MPS bank, now) is to replace all the MPS bank's upper management with new managers who aren't crazy (and/or crooked) like the former ones obviously were. If needs be, bankers from bailout banks should be "on loan" to MPS to replace the out-going crooks for the immediate future of the transition period (until they could farm some better management internally or via external hires). Whether or not they want to put the old MPS bank managers in jail, versus totally let them off the hook (like the Americans did in 2007-2008) is up to the Italians.

-Jim Newhouse

[John]

Hi Jim,

An interesting thing about the 2008 financial crisis is that
regulators, led by New York Insurance Superintendent Eric Dinallo,
colluded with banks and bond insurers to defraud investors by
pretending that worthless securities still retained nominal value.


** Alan Greenspan calls this a "once in a century" liquidity crisis.
** http://www.generationaldynamics.com/pg/ ... tm#e080803


** Bond insurer 'bailout' appears near crisis point
** http://www.generationaldynamics.com/pg/ ... tm#e080208

If that happened in Italy, then Monte Paschi's €55.6 billion in
bad loans would still be worth €55.6 billion, and there wouldn't
be a crisis until the bank ran out of money from being unable to
collect debt payments.

What happened on Wall Street is that the Federal Reserve has poured
trillions of dollars into the banking system, creating the biggest
stock market bubble in world history. However, those nasty Germans
won't allow the ECB to do the same thing, and just bail out Monti
Paschi with printed money.

[Guest]

Why not just print money? The Japanese have been doing it for decades, and it has kept them afloat? Yes, sovereign debt is a ponzi scheme. Why can't we just keep pretending the Emperor has clothes for a few more decades?

[gerald]

Interesting banking problem.

- But this time is always different.-

Form a different era. About 20 some years ago I was applying for a commercial real estate loan and had a heart to heart talk with a Senior Vice President of a mid sized bank in Chicago. He explained how his bank looks at a loan ( at least then, they were later bought out, and the larger bank later got into trouble, hmm ) One of the most important things he said, besides debt servicing etc. was a question they asked themselves.

If the loan goes bad can they get all of their money back? If they can't, no loan. Very simple.

It appears this concept has been lost in the banking industry, or forced to be lost by government requirements.

Same old same old.

[Coordinated fires]

Now now everyone knows that if you question the Feds "guaranteeing" of bad loans you're a racist who doesn't want poor blacks to afford a home...