One must wonder if banks have totally escaped the possibility of being regulated by states. I was pondering the current Irish problem as I read Simon Johnson’s Economix article Will Ireland Default? Just ask Belgium. He pointed out that the debt may reach 150% 0f GDP.
On the face of it, Ireland seems poised on the brink of default. Its debts are very large relative to the size of its economy, most of this money is owed to foreigners and – unless there is an unexpected growth miracle – the country will struggle to pay its debts in full for many years to come….
To be clear, Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product, or G.N.P.; in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.
The amount owed to banks outside of Ireland shows the immense set of dominos that could fall in Europe:
Jacob Kirkegaard, my colleague at the Peterson Institute for International Economics, points out that the claims of foreign banks (in the 24 countries reporting to the Bank for International Settlements) on Ireland “are at over $500 billion — three times the scale of total claims against Greece.”…
German banks in particular lost their composure with regard to lending to Ireland – although British, American, French and Belgian banks were not so far behind. Hypo Real Estate – now taken over by the German government – has what is likely to be the highest exposure to Irish debt….
German banks are owed $139 billion, which is 4.2 percent of German G.D.P. British banks are owed $131 billion, or about 5 percent of Great Britain’s G.D.P. French banks are owed $43.5 billion, which is approaching 2 percent of French G.D.P.
But the eye-catching numbers are for Belgium, which is owed $29 billion. In the relatively small Belgian economy, this accounts for around 5 percent of G.D.P.
Which led me to pose a question to myself: How large are the worlds largest banks relative to the home country economies they ostensibly live within? A little searching led me to this post on Zero Hedge by Tyler Durden: Presenting Total Bank Assets As A Percentage Of Host Countries’ GDP
With the threat of sovereign default and contagion now pervasive within the Eurozone periphery, it is relevant to quantify the relative exposure of various banking centers’ assets as a percentage of host countries’ total GDP. The reason for this is that in Europe for many countries a sovereign default would not have as great an impact, as a risk-flaring contagion impacting these countries’ primary financial entities, whose assets account in some cases for multiples of host GDP. For example in Switzerland, the assets of the top two banks, UBS and Credit Suisse, alone account for nearly 600% of the country’s GDP. And while Switzerland is relatively isolated from the budget and deficit crises in the PIIGS and STUPIDs, other countries such as Italy, Belgium and ultimately France, Germany and the UK, are much more exposed.
- Belgium – Dexia: 180%of GDP
- France – BNP Paribas, Credit Agricole, SocGen: 237% of GDP
- Germany – Deutsche Bank: 84%
- Italy – Unicredit, Intesa Sanpaolo: 101%
- Netherlands – Fortis: 155%
- Spain – Banco Santander: 92%
- UK – RBS, Barclays, HSBC: 337%
It seems to me that the regulators of the banks are in some ways more influential than the Ministers of Finance. They potentially have sway over multiples of GDP assets. If bank regulators require banks in e.g. Switzerland to hold 1% more capital against risk, this means that they must tie up 6% of Swiss GDP on their balance sheets. Obviously, this capital cannot be brought into the vaults only domestically without a significant squeeze on the local economy. It must come from abroad, even further exacerbating the risk chain of dominos. But can regulators avoid ‘capture’ by the mentality of the banks and provide regulation, from the viewpoint of the nation-state, that can contain risk?
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