This post Good Banks, Bad Banks appeared first on Daily Reckoning.
[This post on Good Banks, Bad Banks was originally published on The Institutional Risk Analyst from R. Christopher Whalen.]
In an October 1925, speech in Birmingham, Michigan, Senator James Couzens, the business partner of Henry Ford, sketched out a vision of “good” businessmen, who are ethical, and “bad” businessmen, who are unscrupulous in their dealings with the public, the ultimate consumer.
If you protect the markets from fraud, Couzens argued, you ultimately protect the consumer. The optimistic assumption in the 1920s was that industries could be exhorted and led to ethical behavior by the example and standard-setting of their own business leaders.
Today we have given up on people doing the right thing without coercion. Instead we rely upon regulators and experts of varying flavors to moderate and oversee commercial behavior. Thus there is a bias in favor of regulated industries and a negative view of the private sector.
For example, there is a constant refrain from the regulatory community when it comes to commercial banks vs. nonbanks. Simply stated, the latter are seen as acts of evil that are inferior to regulated institutions.
Leonid Bershidsky, writing for Bloomberg View awhile back, embodies this perspective, chiding “shadow banks” for engaging in “regulatory arbitrage” vis-à-vis the blessed world of regulation. But nothing could be further from reality.
Non-banks represent the private sector, the baseline for economic activity. Banks are government sponsored entities with implicit sovereign support. Most of the major rating agencies, for example, assume a degree of “lift” for the credit ratings of the largest US banks because of the presumption of support for the depositors of these mega depositories in times of crisis.
We should remember that the regulators who supposedly make commercial banks safer than non-banks have an appalling track record. One word: Citigroup.
Regulators failed to predict or avoid financial crises such as 2008 and 2001 before that, to name just two financial events. Our beloved regulators pander endlessly to consumers, but routinely ignore acts of fraud in the world of securities and institutional investors. The false narrative says that the abuse of consumers caused the 2008 financial crisis, but in fact it was widespread securities fraud by the largest banks.
Nonbank lending institutions actually must play by the same rules as the banks, except they have no balance sheet and no cheap backup funding from the Federal Reserve Bank or Federal Home Loan bank. Non-bank mortgage firms, for example, are forced to affirm their credit every day because they often fund their business via short-term bank loans.
Non-banks with investment grade ratings typically run at leverage ratios of 5:1 or less, but some asset classes such as aircraft, rail cars and other types of transportation assets can and do support higher leverage.
Regulated banks by comparison can run at 15:1 leverage on balance sheet and more if they use off-balance sheet (OBS) financing, the core systemic risk issue behind the 2008 financial crisis. Just as …read more
Source:: Daily Reckoning feed
The post Good Banks, Bad Banks appeared first on Junior Mining Analyst.