Policy makers need to focus on restoring the health of economies in southern Europe such as Spain, rather than on supporting their financial institutions, he said.
The euro pared gains, falling 0.3 percent to 99.86 yen today. The currency’s weakness comes before Spanish bond auctions tomorrow, which may cast doubt over the country’s funding capabilities. The nation is also readying a request for as much as 100 billion euros ($127 billion) for its banks.
“The concentration on banks in the southern European area is a bit of a red herring,” said Hester, whose company is Britain’s biggest government-controlled bank after being rescued by the U.K. government during the 2008-2009 global crisis. “Any amount of recapitalization of banks, if the country itself is not on the right track, is a waste of time.”Please re-read the highlighted text again, as Mr. Hester has come out in support of the critical elements of your humble blogger's blueprint for saving the financial system. Specifically, that governmental resources should only be used to support economic growth and never on bailing out individual banks.
Once governments focus on economic growth, it is easy to deal with the banks. The problems in the banking system can be easily handled by adopting the Swedish model with ultra transparency.
Under the Swedish model, the banks recognize all the losses hidden on and off their balance sheets today. Subsequently, they rebuild their book capital levels by retaining 100% of pre-banker bonus earnings.
Banks are able to rebuild their book capital levels, even if they are negative, because a modern banking system is designed to support this. A modern banking system has both deposit insurance (so depositors don't care about bank book capital levels) and access to central bank funding (so depositors know there are funds available should they want to make a withdrawal).
Ultra transparency is needed so that investors can confirm that all the losses were recognized and exert discipline on the banks so they do not take excessive risk while rebuilding their book capital levels.