The question is how these new banks will be regulated to ensure their long-term sustainability. Not only must the institution itself be sustainable as a business, but the overall financing system (for individuals, businesses and even states) must be substantially overhauled. Sarkozy seems to be taking the reins of an EU that resembles a school playground – albeit one with frightened pupils who are more willing than ever to put their mischief on hold. The shock has been such that there is no talk of stricter regulation, but rather of The Reformation of Capitalism, and interestingly We actually published that very same concept a month ago, following the approval of the Paulson plan. At least within the EU, with Sarkozy at the helm and Brown’s support, that is the roadmap. But it now remains to be seen whether Obama shares this view or, on the contrary, whether the lobbies Americans continue to live in Disneyland and are pushing for the situation to change only as much as is absolutely necessary – in other words, more of the same until the next outbreak.
Given our current lack of knowledge about the future, we might surmise that sustainable banking needs to increase its liquidity ratio (2%) several-fold, and that we must return to the very origins of banking. Perhaps we will soon see new sustainable banks that pay interest on our deposits at official rates rather than the Euribor. And furthermore, that they do so at the not that sort of person, rather than to the Euribor plus as is currently being done.
We must bear in mind that the current situation has enabled us to place with arelative normality large sums (€25 or 50 million) under the following conditions: The two major banks, BBVA and BSCH, currently pay approximately 6.75% per annum on these large deposits, whilst second-tier but highly reputable institutions such as La Caixa, Popular, Bankinter, etc., offer rates of up to 8%. It goes without saying that third-tier institutions, such as small savings banks and banks, far exceed that 8% rate for one-year deposits of such amounts.
In fact, large sums of money are remunerated in proportion to the cost of the respective CDSs. But the most alarming thing – if indeed we still have the capacity to be alarmed by anything – is that the spread between the cost of funds paid and received no longer matters at all; that is, the difference between the bank’s asset and liability operations. No bank cares about that anymore, and they shamelessly pay interest on large deposits at rates far exceeding those on the meagre lending they actually carry out. For those who haven’t yet guessed, the reason they do this is that the spread their operations are supposed to generate no longer matters much. core business, all that matters is plugging the holes. Bail out the water in a crude and desperate manner.
That is why sustainable banking must return to its original form, where it would probably be unable to generate the huge profits of recent decades. But there is no doubt that today they would attract a flood of money even if they offered only Euribor minus 1.5% on one-year deposits. Or would anyone with half a brain really prefer to lend their money to Bancaja or CAM at 6%?
Let’s hope we get to see the new face of sustainable banking soon, because personally I’d rather not see the same old familiar faces which, even though they’ve been cleaned up and spruced up by Big Brother, are looking more haggard by the day and are becoming increasingly frightening.