A PRIVATIZED FINANCIAL SECTOR: FOR THE GOOD AND FOR THE BAD
The banking sector has always been one of the most privileged ones in modern economies, as most countries nowadays stand more than half of their public assets on the financial sector, which in many occasions rounds 40% of the total GDP. Banking basic function is generating private debt to increase consumption and obtain profit from interests, paying those who want to save it, and charging those who want to invest it, so their real benefit is found by charging a higher interest than the one they pay the deposit’s clients. Banks often offer a lower risk and a much more secure and stable investment process by evaluating and diversifying the different risk factors, and sometimes this can generate losses, as in case of debt unpayment, when banks would still be forced to pay their depositors. Shareholders and depositors are the main and most important branch into the banking system, as they are the ones generating confidence to the sector by incrementing the credit flow, with the single objective of obtaining a higher index profitability than previously invested, and uncertainty, as the one lived these last two years has played a negative role for these characters, contracting credit loans of banks and forcing financial equities to rise its types of interest.
Nowadays, many banks have changed their role and have become fully dependent on the State intervention, reducing its risks, and forcing the proper State to increase the cash flow into this sector, reducing the need for contributors as depositors. From one view, we could admit that what the State gains from it, is the possibility of Banks of reducing their interest rates and incentivize consumption directly by charging cheaper loans, and increasing credit in the economy, which will produce an increase in GDP levels in the short term, even though in the long run will devaluate the currency due to an overload in private debt. Central Banks also play a key role in developing the credit flow in the economy, as they finance many private banks and societies permanently, dropping the cost of these operations over taxpayers, who in most cases don’t benefit from these refinancing of debt or “financial rescue”. On the other hand, many States have compromised with banks to offer rescues every time one of them is in risk of failure or bankrupt, since the recessions of 2008 and with the unique objective of offering consumers and investors more confidence and preventing the circumstances of the “credit crush” from presenting twice.
These privileges are always paid by mean citizens and are used by banks to operate with major confidence, but also with lower knowledge of risk management and higher turnover rates. In Spain, just as in Italy, which is the country of which we will be talking later, the financial sector has to face minimum regulations to operate, which is fully positive, opening the door to stable, cheap and fast credit and finance for banks, which also directly increases risk without taking into account that the generated debt in this process has been public. Banks try to assume extraordinary risks in their investment to maximize their profit, but are forced by the State to lower their interest rates, as they have indirectly control over this sector; being the business creditor. This system is not fair, nor efficient or even productive, as profits are always privatized and given to investors, but not reinvested into production, while losses are made always public and paid for by the State, generating higher internal debt.
IN THIS BAR CHART, WE CAN OBSERVE THE PERCENTAGE OUT OF THE TOTAL GDP, BANKING ASSETS REPRESENT IN MODERN ECONOMIES:
Last year’s we could see a movement with series of reforms which brought in hope by trying to reduce the banking sector privileges and making losses public. This new resolution applies that shareholders of the bank should cover primary losses by participation percentage and that creditors and donors of these banks should assume the secondary losses if these persist, trying to make the equity more solvent, and only if the participations of shareholders and creditors was insufficient, in that case the State would be able to intervene and recapitalize the financial equity, which is mostly called “bail-in”.
From a liberal point of view, this solution is not perfect, but it prevents taxpayers and second people of paying bank’s losses and reduces state intervention in the economy, returning each factor its role, being the one of the State, only to intervene in border situations, to reduce risk of a collapse of most of the sector. Furthermore, member States of the European Union didn’t want to accept this doctrine, as many political parties knew that many of their voters were bank creditors and people who benefited from State intervention in the financial sector, which is worse for contributors and external investors, who would see their capital reduced primarily.
Italy is deeply involved in this situation, as this last week, the Italian Parliament announced a bail-in of nearly 20000 million euros to recapitalize entities as Monte dei Paschi, which would be paid off through deductions in the National Budget. This bank was forced to ask for the public rescue, as it could re-join all the necessary market capital to prevent bankrupt, either through investors or creditors. The Italian Government didn’t even think about it, and as a reflex accepted to give out an amount of nearly 10000 million euros, just for Monte die Paschi, which will remove enormously losses form the creditor’s account.
WE CAN OBSERVE A GRAPH REPRESENTING THE ITALIAN BANKS’ RISK OVER THE LAST YEARS:
The new normative hasn’t even been put in practice, and many governments and institutions have located themselves in favour of breaking this law, and what many politicians propose to overcome this situation is investing more and more capital in the same fraudulent projects! The European Union shouldn’t rescue the Italian financial sector under any conditions, to protect taxpayers and contributors and forcing banks to operate more efficiently and with a higher control over risk management. We should maintain alive the “bail-in” normative to prevent the State from intervening directly in every productive sector.