Iceland, Switzerland, Denmark, Sweden, Jordan and countries with banks that are too big to bail out

There is a wonderful (simply wonderful) paper by Willem Buiter and Anne Siebert on the Icelandic banking crisis.

It’s the sort of paper that puts the lie to the line “nobody expects the Spanish Inquisition” because the core part of the paper was written – under contract – to the Icelandic Central Bank.  All agreed that the contents were “too hot” and the academic authors agreed to secrecy. 

Now that the worst has happened there is less need for secrecy so the paper has been published along with policy prescriptions for Iceland.

Ok – well and good. 

Their explanation was that it doesn’t matter whether the Icelandic banks were solvent or insolvent – there was a simple problem that the banks were large compared to the Icelandic economy and the governments could not conceivably bail them out.  As a result a run on one of them would collapse them all. 

I will express an opinion on one – and one only.  I think Kaupthing – which was by far the most aggressive purchaser of foreign assets – was probably insolvent. 

Anyway the lesson was that a country could not afford to have banks whose liquidity they could not guarantee in a run.  If the banks were so big you could not guarantee the liquidity then the banks were set up to fail.

Of course Iceland is not the only country with big banks.  [It was – when I did a study a while ago – the country with the second highest bank revenue to GDP ratio in the world…]

The country that beat it of course was Switzerland.  And sure the Swiss banks are better than Kaupthing – but UBS is not that good – and relative the Swiss Economy it is about as big… that is too big to bail out. 

I have been saving this post ever since I read the Buiter/Siebert paper (on the weekend) but Felix Salmon has sort of beat me to the punch – and the competitive instinct has made me run with it.

The other countries that stand out as having big multi-currency, multi-national banks are Denmark (Danske), Sweden (Nordea, SEB and Swedbank) and Jordan (Arab Bank).  Of these Danske is usually quite well run but they purchased a bank in Ireland before Ireland’s economy went to crap.  [They run it well but…]  And they purchased a bank in Finland (Sampo) on which they have not only overpaid but stuffed up the system integration.  Still I like Danske management personally and the good bits are very good.  Also they sold their crappy investment bank to Kaupthing a few years ago for an insane amount of money – and that sort of win covers a multitude of other sins.

Nordea is (in my opinion) very well run (but I no longer own shares).  Swedbank is deluded and awful and SEB has good bits and bad bits.

Arab Bank is a fine institution if you don't mind litigation risk associated with funding terrorism.

Of course there is one remaining country with banks that are large-relative-to-the-economy – and that is the UK.  RBOS and Barclays are both enormous and - at best opaque. 

Now do American taxpayers want to pick up UBS or Barclays?  I don’t think in the end they will have any choice.  The banks will fail or they won’t.  And if they fail – well I hate to say it – but the new administration will be stuck with it.  I guess UBS will lose its tax avoidance business in the process…  and a few American rich folk can help pay for it all with their back taxes...  unfortunately the risks to the system are bigger than that...

 

 

 

 

John Hempton

A sort of postscript... I guess ING is very large compared to the home market.  It is not without issues... but generally I think it is very well run.

I was also probably too kind to Danske - as noted in the comments...