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Social spending at a high level, for big banks

It is not a question of direct subsidies from the treasury, but of indirect subsidies, such as in agriculture or the airlines. The flights are only so cheap because airlines do not have to pay anything for the enormous environmental damage caused. Air traffic is not burdened with petrol and VAT, as is car traffic. Not to mention a carbon tax.

Other indirect subsidies benefit agriculture. In addition to the direct subsidies of around 3.7 billion Swiss francs a year from taxpayers’ money, consumers have to pay an additional 3.5 billion Swiss francs in the form of higher prices because of border protection. Agriculture thus benefits from a total of more than seven billion Swiss francs in subsidies per year. That is what the OECD has calculated.

But this is only a fraction of the subsidies that the big banks benefit from. These are all indirect subsidies, but they are slightly less obvious than in agriculture or air transport.

In his latest book*, professor of finance Marc Chesney of the University of Zurich cites a little-noticed calculation by the International Monetary Fund from 2014. The IMF reported indirect subsidies to the major Swiss banks for 2011 and 2012 at USD 25 billion per year, equivalent to approximately 26.7 billion Swiss francs. The main reason is that large banks can raise many billions at lower interest rates than other market participants. Their creditors and investors are convinced that the big banks cannot go bust because they benefit from an implicit government guarantee. Thanks to this advantage, large banks can expand even more at the expense of other banks. The same is true of the big banks abroad: for the eurozone, the IMF gave the value of implicit government guarantees at USD 150 billion per year, and for the UK and Japan, at USD 55 billion each.

Founding of “Bad Banks”

Big banks would benefit from more indirect subsidies than just interest-rate benefits, Chesney said. If their highly speculative activities end in larger losses, they may outsource securities that have become scrap to a “bad bank”. “Which other industry enjoys so many benefits,” Chesney asks rhetorically. It is not possible to imagine that, for example, a baker or a computer company may set up a ‘bad bakery’ or a ‘bad computer company’ in order to carry out risky or dubious activities outside their balance sheets in order to create a ‘bad bakery’ or a ‘bad computer company’ in order to create a risky or dubious activity outside their balance sheets in order to create a risky or dubious activity outside of their balance sheets in order to create a impending insolvency. Without such privileges, some major banks would have gone bankrupt, Chesney explains, especially banks in Italy or Germany, Deutsche Bank.

Implicit state guarantee leads to highly speculative investments

That’s not all. In addition, large banks benefit from the European Central Bank’s non-market zero interest rate policy. With the free money, they can, for example, invest in questionable government bonds of Greece, Italy, and other problem countries. Their solvency “is virtually guaranteed by the ECB” and their government bonds yield up to about two percent, i.e. “lucrative” yields today.

Or then big banks create and distribute “complex and often toxic financial products” with the free money. Such products carry risks that are “not understood by the unlucky bird that acquires them from the bank”. Their sheer quantity makes these products a “systemically important risk to the economy, because private customers or companies run into great financial difficulties as soon as the poison spreads” and the true nature of these financial products is revealed.

“Financial casino without major risk of loss”

Today, as in 2008, taxpayers would have to bail out big banks in distress. This, in turn, leads big banks to do so, or allows them to take excessive risks: “Your bosses assume that the bank does not have to stand up for these risks”. They could therefore operate an actual “financial casino” without taking a large risk of loss themselves, Chesney criticizes. The state could not drop a UBS whose balance sheet total in 2017 was 119 percent of Switzerland’s total gross national product, or a Credit Suisse whose balance sheet total even exceeded GNP by 37 percent.

The actual systemic risks are even greater. Most speculative derivatives transactions would be handled by large banks outside their bank balance sheets and outside the stock exchanges. This “gigantic off-balance sheet business” reaches multiples of the balance sheet totals. The exact volume would obscure the banks “in a particularly opaque and complex manner”.

The finance professor estimates the size of these activities on the basis of derivatives transactions, which are usually carried out outside the balance sheet.

Part of this is the so-called “credit default swaps” CDS, whose function should be the risk hedging of loans. In reality, in most cases, these CDSs are used to bet on the failure of a company or even a country.

At Credit Suisse alone, a volume of 28,000 billion Swiss francs

In 2017, Credit Suisse achieved a business volume of an incredible 28,800 billion Swiss francs with all derivatives traded, which was approximately 36 times the CS balance sheet total and 687 times the CS equity. This balance is also about 43 times greater than Switzerland’s 2017 GDP and represented 37.3 percent of world GDP.

Only 0.2 percent of this astronomical 28,000 billion served real hedging transactions. The rest are pure bets by a casino financial industry and market manipulations, which bring no benefit to the real economy, but only dangers.

At UBS, the volume of derivatives in 2017 amounted to 18,500 billion Swiss francs, which was 20 times the UBS balance sheet total and 361 times UBS equity. “Who can still believe that the situation is under control?” asks Chesney.

The balance sheet transactions of the major banks also include “structured products”, which usually consist of a combination of several derivatives. For Chesney, they are among the “particularly lucrative bets of the casino finance industry”. Their good ratings ratings are “misleading for customers”. “Structured products”, the volume of which amounted to 275 billion at Swiss banks in 2017, are “a real danger for private investors, pension funds and municipalities,” warns Chesney. “Paradoxically,” the supervisory authorities would allow this.

At Deutsche Bank, the volume of derivatives in the same year was EUR 48,265 billion, i.e. 33 times its balance sheet total, 708 times its equity and about 15 times German GDP and about 67 percent of world GDP.”

Necessary measures

The Zurich professor of finance not only analyses the current risks, but proposes a whole series of measures with the aim of abolishing the implicit state guarantee for large banks. The financial industry has so far successfully blocked such measures. Five of them are listed here:

  1. The big banks must be required to have an (unweighted) own chapter of 20 to 30 percent. Today, it is only 4 to 5 percent. For a customer’s mortgage, the same banks require equity of at least 20 percent. “How can big banks, for their own business, get rid of the constraints they impose on their customers?”
  2. The big banks should have to separate speculative investment banking from lending, as was required in the USA until 1999. Then investment banks will no longer be able to use client funds as play money in the financial casino.
  3. New financial products for investors, including structured products, shall be certified and approved by an independent authority, as is the case with medicines, food or cars.
  4. The sale of toxic products should be punishable as a financial offence, as is usually the case in other sectors of the economy. These are products that are considered harmful to economic stability because they increase the systemically important risk.
  5. Derivatives such as CDS should be traded transparently and mainly traded as useful hedging products. The sale of financial products used to bet on the failure or bankruptcy of a company or even a country would thus be severely restricted.