Hugo Dixon

It’s the funding, stupid

Hugo Dixon
Nov 29, 2010 16:51 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Running out of cash — rather than insolvency — is what causes financial crises such as the euro zone’s. Yet the lion’s share of the effort by policy makers around the globe has been to shore up solvency not funding. Unless that changes, the world will lurch from crisis to bailout and back again.

Ireland’s bank crisis is only the latest example of how seemingly solvent institutions can be brought to the brink because they can’t fund themselves. It was only four months ago that Allied Irish Banks (AIB) and Bank of Ireland were given a clean bill of health in the European Union’s official stress tests. One weakness of these tests was that they only stressed solvency not liquidity, although that may be remedied next year.

Ireland’s banks didn’t have a large enough base of retail deposits. AIB’s and BoI’s loan-to-deposit ratios are just above 160 percent. That made them excessively dependent on wholesale money. When that dried up, they had to turn to the European Central Bank. When deposits from corporate customers also started to flee, emergency action was required.

Sadly, this is an all-too-familiar story. Funding was the Achilles’ heel of banks that went to the brink in 2008. The likes of Lehman Brothers, Northern Rock, Washington Mutual, Royal Bank of Scotland and Fortis may have had inadequate equity. But death through insolvency is a slow one. Death, or near-death, through lack of liquidity is a rapid one.

The world is wasting a good crisis

Hugo Dixon
Nov 22, 2010 18:14 UTC

Rahm Emanuel, President Barack Obama’s former chief of staff, popularized the motto that one shouldn’t waste a good crisis. But there is a severe risk that this is precisely what the world has been doing by being excessively soft in bailing out banks and countries since Lehman Brothers went bust in 2008.

Bailouts, such as that being negotiated for Ireland, may be needed to prevent a descent into chaos. But the conditions must be tough. Otherwise, the world won’t learn the lessons from the crisis and justice won’t be seen to be done.

Ireland’s original bank bailout in the wake of the Lehman bankruptcy is one of the most egregious cases of excessive softness. Dublin gave a blanket guarantee to its banks’ liabilities, including wholesale funding. A more targeted guarantee focusing on retail deposits would have been far better. Not only would the creditors have been punished; the state itself wouldn’t now need its own bailout.

UK bank pay collusion would be least bad solution

Hugo Dixon
Nov 15, 2010 21:59 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” Normally, Adam Smith’s dictum is a good guide to policy. But in the case of UK banks and their bonuses, it isn’t.

Clubbing together to keep bonuses down wouldn’t please competition purists. Depending on how such talks are orchestrated, it may even be illegal. One could imagine peculiarly tin-eared traders taking their employer to court for
unfairly conspiring to keep down their pay.