Monday, April 22, 2013

Protecting bankers, Germany says "liability cascade" must prevail in bank bailouts

I keep wondering how many times bankers must be protected from the consequences of their actions until global policymakers realize that this protection does not a) result in banking systems that are fixed or b) economic growth.

In the latest round of protecting the bankers, Germany has called for rescuing the banks by enforcing a liability cascade that starts with shareholders and moves towards and includes depositors.

Regular readers know that based on how modern banks are designed the number one source for rescuing and recapitalizing banks is future bank earnings.

Please note the difference between recapitalizing banks using future earnings versus using deposits.
When future earnings are used, banker effectively "pay" for the damage they did to the bank because their cash bonuses are minimized until bank book capital has been rebuilt.

When deposits are used, bankers keep receiving their cash bonuses while the depositors and the real economy suffer the losses.

Plans in the euro area to allow the direct recapitalization of failing banks must stick to a hierarchy of responsibility that starts with the banks’ shareholders, the German Finance Ministry said. 
In its report for April, the ministry said a “liability cascade” must prevail in any attempt to save a bank, allowing the European Stability Mechanism to allocate resources on its main job of averting state insolvencies. 
“From the German government’s point of view, it’s important to limit the volume for direct recapitalization to allow the ESM to focus on its core task,” the ministry in Berlin said today. “It’s also important that the liability hierarchy is followed,” it said, echoing comments made by Finance Minister Wolfgang Schaeuble in Brussels this month.
All of Germany's stated goals are more easily achieved by tapping unlimited amounts of future bank earnings as a source for recapitalizing the banking system.

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