Rebuilding the banks;
Anonymous. The Economist. London: May 16, 2009. Vol. 391, Iss. 8631; pg. 43
Banking is the industry that failed. Banks are meant to allocate capital to businesses and consumers efficiently; instead, they ladled credit to anyone who wanted it. Banks are supposed to make money by skilfully managing the risk of transforming short-term debt into long-term loans; instead, they were undone by it. They are supposed to expedite the flow of credit through economies; instead, they ended up blocking it. The costs of this failure are massive. Despite public rage over bank bail-outs, the industry has also comprehensively failed its owners. The scale of ...view middle of the document...
The costs of this failure are massive. Frantic efforts by governments to save their financial systems and buoy their economies will do long-term damage to public finances. The IMF reckons that average government debt for the richer G20 countries will exceed 100% of GDP in 2014, up from 70% in 2000 and just 40% in 1980.
Despite public rage over bank bail-outs, the industry has also comprehensively failed its owners. The scale of wealth destruction for shareholders has been breathtaking. The total market capitalisation of the industry fell by more than half in 2008, erasing all the gains it had made since 2003 (see chart 1, next page).
Employees have scarcely done better. The popular perception of bankers as Porsche-driving sociopaths obscures the fact that many of the industry's staff are modestly paid and sit in branches, information-technology departments and call-centres. Job losses in the industry have been savage. "Being done" used to refer to hearing about your annual bonus. Now it means getting fired. America's financial-services firms have shed almost half a million jobs since the peak in December 2006, more than half of them in the past seven months. Many have gone for good.
The pain is nowhere near over. The credit crunch has been a series of multiple crises, starting with subprime mortgages in America and progressively sweeping through asset classes and geographies. There are now some glimmers of optimism in the investment-banking world, where trading books have already been marked down ferociously and credit exposures to the real economy are more limited. But most banks are hunkering down for more misery, as defaults among consumers and companies spiral. In its latest Global Financial Stability Report, the IMF estimates that the total bill for financial institutions will come to $4.1 trillion.
With so much red ink still to be spilled, it may seem premature to ask, as this special report does, what the future of banking looks like. For most industries, failure on this scale would mean destruction, after all. Banks, notoriously, are different. The most seismic event of the crisis to date, the bankruptcy of Lehman Brothers last September, demonstrated the costs of letting a big financial institution collapse. Trust evaporated and credit dried up. "October was the most uncomfortable moment in my career," recalls Gordon Nixon, the boss of Royal Bank of Canada (RBC). "There was a possibility that the entire global banking system could go under."
Concerted actions by governments since then, first in the form of capital injections and liability guarantees, and more recently via schemes to buy or guarantee loans, have signalled their determination to stabilise and clean up their big banks.
Politics notwithstanding, the commitment of governments to defend their banking systems removes the existential threat to the biggest institutions (or, more precisely, transfers it to sovereign borrowers). Bank bosses have learnt not to pronounce too...