Trésorier magazine - n°77 - 1er trimestre 2012 - (Page 10)
Banks and states: breaking the deadlock
anks know two types of investors with an asymmetrical profile: shareholders and depositors (savers). The shareholders provide the solvency with their equity. They are the owners of the companies of which they hope to get dividends from and create capital gains in. But in compensation of the return they hope for, they are the first ones to absorb the losses. Apart from liquidity problems, it is only when the shareholders have lost their entire invested capital that depositors will be negatively impacted and will recover only part of their savings. At the same time, if the shareholders carry the first losses, they will never have to fill up the liabilities by investing more equity when there is a shortage.That is the principle of a company with limited liability. Technically speaking, the shareholders bear the first risk of loss in order to protect depositors. As a consequence, banks must have sufficient equity to prevent depositors from being negatively impacted in case of major losses. This equity belonging to the shareholders acts as a shock absorber.The role of prudential regulations like Basel 3 is to improve this.
Since long, academic theorists fear that on average, the global level of equity is insufficient to absorb extreme shocks. This constitutes a systemic risk that could create a malfunction paralyzing the entire financial system.
Of course, another phenomenon is taking place in the blind spot of bank bailouts. When the governments will emerge from the banks' capital – which is likely in 3 to 5 years – they will sell their shares back to shareholders (state funds and others). The process will be extremely delicate: new shareholders bringing equity to compensate the return of a limited liability for the shareholder. It will lead to a shareholder dilution, which becomes even more likely if the capital requirements have been raised. Unfortunately, the problem affecting the sovereign debt introduces a new dimension in the configuration of the banks. In fact these debts have traditionally been exempt from the weighing of equity because they are risk free. In other words, the shareholders of the banks do not have to cover the investment in sovereign debt bonds with equity. It is one of the privileges governments have granted and private shareholders have benefited from the windfall, since they could limit their investment of equity. The Greek and perhaps Portuguese example makes the assumption of risk free sovereign debt completely invalid.Therefore, it would be logical to see sovereign debts as risky and
This explains the role of governments in the rescue of weakened banks.As banks play a central role in the economy and at the same time it is impossible to require shareholders to meet their liabilities, it is the government or a new shareholder's task to provide additional equity. In the recapitalization of Belgian banks, the government has replaced shareholders that were bankrupt by using its own bank loans. Nationalization is thus (in theory) providing an unlimited responsibility to ensure the survival of the bank.
Table des matières de la publication Trésorier magazine - n°77 - 1er trimestre 2012
EDITORIAL - 10ème anniversaire de l'EACT
INTERVIEW - Oleg Williamson, Treasury Manager EMEA of Parker Hannifin
FORUM OF ADVERTISERS
Trésorier magazine - n°77 - 1er trimestre 2012