Wednesday, November 12, 2008

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...


Anonymous said...

Have you at all looked at Danske's risks?

1. Big USA Sub-prime exposure, 5M unsold homes.

2. Own currency with thin reserves

3. Small economy, comparatively

4. Leveraged and mortgage lending gone too far domestically

5. Ireland risk

6. East-Europe risk

7. Baltia risk

Yes, the numbers so far are good, but to quote Meredith Whitney:

"If I had trusted banks' own numbers on these, I would not have understood anything of what is to come."

Somebody needs to take a long and hard look at their tier 2 assets and beyond.

I'd be mildly surprised, if they come out of this unscathed.

And yes, I agree on Swedbank.

John Hempton said...

Yes I have looked extensively at Danske Bank's risks. Its a funny story - for a while maybe the best centralised systems/mathematical risk assessment retail bank in the world.

But they have (totally) stuffed up the systems with the Sampo acquisition - as some people on the blog have pointed out. Also they got a Baltic exposure and overpaid. That was a shockingly bad buy - just scary bad.

They also stuffed the timing up for the Irish bank - but they ran the systems well. In the scheme of things the US exposure is small.

The Danish Mortgage and property market scares me a little too.

I personally like the guys running it though... so it is a little hard for me to pick it apart. But yes - I am not that opposed to your observations on it.


PS. Can you please please email me.


Donald Pretari said...

"Now do American taxpayers want to pick up UBS or Barclays? I don’t think in the end they will have any choice."

Are we the lender of last resort for the world? Do countries see us as implicitly backing their banks up, or is this simply a particular set of banks?

Don the libertarian Democrat

Anonymous said...

John - big fan of the blog. As an aussie myself i find it refreshing to read rational insight rather than blathering bullishness from fellow countrymen.

Have you looked at Belgium and Dexia? Also, i think you give ING far too much credit. Their leverage to tangible equity is atrocious.

Edward Harrison said...


The Swiss blog Zeitenwende picked this up ages ago regarding UBS and Credit Suisse. The Swiss are rather anxious about all of this -- and angry that their banking industry is looking shabby. I translated their post into English in early October. Here it is:

The quote that is most relevant is this one:

UBS and CS are, on the one hand, too big to fail for Switzerland. However, Switzerland is also too small to save the big banks. Since the [Swiss] Confederation cannot draw upon sparring partners in the EU, it needs a different solution and my solution is: Pension funds!

By no means do I think the Swiss are out of the woods yet.



John Hempton said...

I have looked at Belgium and Dexia. Dexia was once a simple public finance bank. It then proceeded to to 50 acquisitions in quick succession. The one they are most famous for these days is FSA - an Ambac/MBIA competitor.

But the one I remember is Artesia.

I was once short Lernout and Hauspie - the software fraud. In the period before they blew up they borrowed money from Artesia (then a mutual) and a lesser amount from KBC. I played a five day short around KBC for pennies (when they declared the loss). But I desperately wanted to short Artesia - a bank I had previously never heard of.

Anyway - the reason I never heard of it was that it was a mutual and I could not short it.

It got itself into some hot water and sold itself to Dexia (effectively a bail out).

Dexia has a few things like that in it.


MattJ said...

John- Can you go into a little more detail why you think American taxpayers will be stuck fixing UBS and/or Barclays rather than European taxpayers? We look like we have rather more than we can handle just dealing with US banks, car companies, etc. without trying to fix European banks as well.

elartistamadridista said...

What about Spain? Big banks and a crappy economy...

Anonymous said...

Danske Bank IMHO is the HBOS of Denmark.

As far as I am aware Danske Bank is the only bank/company that have a direct access to the FED via a 30bn USD CP line.

The Danish goverment has guaranteed all deposits in Denmark with the unintended consequences that investors would not buy the variable rate mortgage bonds (ARMS) coming up for renewal in December.

Solution, the goverment changed the discount factor for pensions funds to make more room for them to buy bonds.

On top of that household debt to disposable income in Denmark is 4.7x, the highest in the world (apart from Iceland now after the collapse of the currency)

Danske Bank is dealing with a solvency crisis not a liquidity crisis.

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