Saving Financial Institutions like Banks

The Bank of Canada (CBC, 23 July 2012) reported that a foreign takeover may help keep a struggling company from failing, and remove any domestic obstacles that might have complicated or prolonged its demise.

This does not seem to be the case for the Bank of Scotland. In 2010, the Bank of Scotland had three subsidiaries, Northern Rock, HBOS and Lloyds TSB, which collectively had a total of 81,500 employees, with loans totaling $112 billion.

The takeover of Northern Rock by Lloyds TSB took Northern Rock into bankruptcy, and prompted the Bank of England to dramatically reduce the interest rate, and credit and mortgage loans.

So, what would happen if we allowed the Bank of Scotland to be acquired by a foreign bank? The Bank of Scotland was only in financial trouble after it had taken money from other banks, and then sold bonds in the mortgage market.

So the cost of saving it would be to save banks that are currently in trouble, and not save the struggling bank.

At least with a bankruptcy, the government could set some sort of criteria, to protect domestic banks, such as requiring that the foreign acquirer give preferential rates to domestically based mortgage holders.

As a side note, if we had a similar policy for American banks, we would have prevented the failure of both Lehman Brothers, and AIG.

The fact that the Bank of Scotland is in trouble because it took too much risk is not a problem unique to the Bank of Scotland, nor is it a foreign takeover problem. The problem exists in the banking sector across the board.

We have seen the same scenario play out in the financial markets.

Credit default swaps show that the banks taking over Northern Rock were at serious risk of failure, and required huge loans.

However, if we learned anything from the financial crisis, it’s that we must never take the credit risk of our governments and corporations. We have to create a financial system that protects the economy against major risks.

In the first half of the twentieth century, the United States established a banking system that provided low interest rates, good credit and protections for mortgage holders.

As a result, the economy thrived, with low unemployment. But in the second half of the twentieth century, the Federal Reserve raised interest rates, which is a key factor in the current crisis.

If we want a strong economy in the future, we need to take the lessons of our history, and build a financial system that provides low rates, good credit and protections for all.

Americans should learn from our recent history, and avoid repeating the mistakes of the past.

It may seem foolish to talk about financial crises in 2012. But if we want a strong economy in the future, we must learn from the mistakes of the past, before it’s too late. Any online casino PayPal supports, for instance, wouldn’t be wise in waiting until there’s a threat from the payment processor to cut off support, before it starts acting in preparation.

What policies have worked in Europe?