The real problems with banking

Banks and banking, have been a large topic of discussion in recent years. There are some things that are very wrong with banking, but they aren’t what most people normally think about.

Many people blame banks for being reckless, and they were, but many people then associate this  with Capitalist greed or some such nonsense. In reality, banks are a necessary element in the economy, but just another element in the infinite spectrum of the economy. There is no real reason why people, or the economy, should be subject to how that particular element is behaving.

However, recent changes in the way banks work, have created a system where the activity of banks can affect us directly, and this had a lot to do with the proliferation of the financial crisis.

I’m talking of course of the Glass Steagall Act, which was repealed as recently as 1999. The Glass Steagall act, also known as the banking act, amongst other things, clearly established a separation between commercial and investment banks in 1933, which was, like I said, repealed in 1999.

To fully understand this we must look at what the differenece is between these two forms of banking.

Commercial banks, would be your typical deposits savings bank, theoretically safe. The investment bank would be the one engaging in more risky investments like derivatives and such.

So it is no surprise really, that when you integrate those two functions into one, combining the regular deposits, with the risky investments, things get muddled up, and the “systematic” risk of collapse increases. Suddenly, when the stock market crashes, the investment arm of your bank gets hit, and indirectly, so do you.

So the integration of these two types of banks, increases the systematic risk of collapse. We could say, that this condition is what creates the “too big to fail” corporations they talk about today.

The second problem with banking is the high level of political influence it has. This goes from getting government to accept policies such as the TARP (troubled-assets relief program) to the legislation applying to banking activities.

In fact, during the crisis in Greece, many people argued against the bail-in, what I explained as a normal bank recapitalization, because people seemed to be losing their deposits.

A closer look however, shows that this was not a normal type of bank recapitalization. In fact, due to LEGISLATION, financial institutions and government entities amongst others, get preferential treatment over regular depositors. This means that the “junior” and “senior” creditors are reversed.

Furthermore, in the 2005 bankruptcy law, derivative liabilities were made the most senior form of debt, more so than the deposits!.

As you can see, the banking system  has been perverted, mostly due to the political influence it has.

This kind of power that banks have over governments can be easily explained. The banks help governments build-up debt, they in turn get favorable treatment. They get bailed-out, they operate as a cartel, and they can rob us with impunity as the bail-in example shows.

2 comments

  1. Buenas James, para empezar me sorprende que critiques que quitasen la ley Glass Steagall, ya que precisamente era un ley que regulaba la banca y gracias a su retirada todos los bancos tenían plena libertad de invertir donde quisiesen, ¿que es lo que los liberales defienden no? Plena libertad y los consumidores ya escogerán donde deben guardar su dinero y gracias a la oferta y la demanda según lo que quieran los consumidores acabaremos teniendo los bancos que todos queramos. Aún así, celebro que creas que regular la banca sea necesario.
    En segundo lugar, estoy de acuerdo contigo con lo que dices que los bancos fuerzan a los políticos a realizar algunas medidas que les beneficien como la Troubled Asset Relief Program, pero aunque no me parece bien la TARP no puedes utilizarlo como argumento de la crisis bancaria porque esta medida se realizó para intentar que los bancos no se hundiesen más, lo que significa que para nada es una causa de la crisis bancaria puesto que es posterior a ella.
    Respecto al tema del bail-in, es evidente que los acreedores no querrán pasar a ser accionistas de un banco que está en banca rota, porque las acciones de este banco no valen NADA, y no les puedes obligar a convertirse en accionistas.

    Para acabar estoy completamente de acuerdo con:
    Furthermore, in the 2005 bankruptcy law, derivative liabilities were made the most senior form of debt, more so than the deposits! (tambien me parece increíble)
    Y
    This kind of power that banks have over governments can be easily explained. The banks help governments build-up debt, they in turn get favorable treatment. They get bailed-out, they operate as a cartel, and they can rob us with impunity as the bail-in example shows.

    Y estoy a medias de acuerdo con tu frase:
    As you can see, the banking system has been perverted, mostly due to the political influence it has.
    Es cierto que la política ha regulado mal a los bancos y básicamente les ha ayudado a convertirse en “monstruos” pero también es cierto que los bancos necesitan ser regulados por la política, porque, por ejemplo, si no fuese por la regulación de la banca por el poder político la ley Glass Steagall no habría existido, y debería regularse en muchos más sentidos.

    Así que en conclusión, desde mi punto de vista, no podemos dejar a la banca libre porque te la lía, y está claro que hay que conseguir que la banca pierda toda su fuerza que tiene sobre la política, y para ello debemos cambiar completamente nuestro sistema político puesto que, el que tenemos actualmente ha demostrado claramente que es incapaz de controlarla.

    1. Es cierto que pedir regulaciones no suele ser algo que me guste, pero creo que con este tema se pueden realizar excepciones ya que la combinación de las dos bancas puede llevar a confundir al consumidor y a realizar acciones fraudulentas por parte de los bancos.
      En segundo lugar yo nunca he dicho que la TARP fuese la causa de la crisis bancaria, simplemente un ejemple de como se aprovechan del Estado.
      Y para acabar, no es cierto que las acciones del banco no valgan nada, si logra recapitalizarse, y por lo tanto puede seguir operando si que tienen valor sus acciones. Si que es cierto que es posible que algunos acreedores hubiesen preferido el dinero, pero por eso estos son los invertores de alto riesgo. Lo que yo denuncio aquí principalmente, es que debido a la legislatura, en caso de quiebra, son las entidades financieras y otros grupos “privilegiados” los que tienen prioridad en el concurso de acreedores, cuando en realidad deberían ser los depositos bancarios de la gente de a pie, los que tengan preferencia. Y esto ayudó a contribuir a la ilsuión de que, no podemos dejar que quiebren, porque perderemos nuestro dineo, lo qual, simplemente, no tiene porque ser cierto.

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