When Banks are Bigger Than Countries – Beware!

By Shlomo Maital

                   Credit to GDP      

    (For June 2011, post-crisis)

   You know you are in trouble when the tail starts wagging your dog.   And – when the banks are much bigger than the countries in which they reside.  The chart above * shows bank assets as a fraction of the GDP of the nation in which they function.   Not shown are: Cyprus (7.2 times GDP) and Malta (7.9 times GDP).    

   Luxembourg, a favored tax haven, has bank assets 16 times its GDP. But this is an anomaly – investors are unlike to pull their money out, because there are no safer havens for underground money.  According to taxhavens.biz, “…As a tax haven Luxembourg does not tax the interest gained by offshore bank accounts. Offshore bank accounts in the tax haven of Luxembourg are a guaranteed means of increasing capitals whilst at the same time receiving quality asset protection. In the tax haven of Luxembourg offshore bank accounts are very easy to establish and maintain.”   But the other countries with very high bank-asset-to-GDP ratios are in trouble or have been:  Britain (a financial center), Ireland, Switzerland, Netherlands, Spain.   And of course, lately, Cyprus.  Is Malta next in line?  ?Are banks too big even in France and Germany?

     The problem?  It is easy to make a fortune attracting hot money, most of it black.  But to get that money, you have to make it as easy for it to leave as it is to enter. That means, you can lose it in an instant, as Cyprus lost most of its Russian laundered money just moments before, on March 16, it tried to lower the boom on its depositors and freeze their accounts, under EU pressure. (Someone at Cyprus’ Central Bank apparently leaked the news to oligarch Russian depositors, who bailed out electronically just in the nick of time).   The message to nations: Avoid making a quick buck on quick bucks.  They are unstable, and when they leave, it will take years of pain and suffering to clean up the mess, as has happened to Cyprus.  When hot money leaves, your banks are bankrupt, in an instant.  Cyprus has now imposed restrictions on moving money out, against EU laws and far far too late. 

   I am very fond of Cyprus, and even co-authored a book on it,  Reinventing Cyprus.  One of my friends in Cyprus served for years on the Board of one of Cyprus’ leading banks, and kept it out of hot water by insisting it avoid the money laundering no-questions-asked deals that Luxembourg and Switzerland love.  He saved the savings of many Cypriots by his courage.  Why then weren’t other ‘wise men’ able to do the same, in Cyprus, UK and elsewhere? 

   When banks get bigger than the countries they operate in, beware.  Banks are meant to finance industry, rather than vice versa.  It seems we have learned little or nothing from the 2008-12 global financial crisis.  The banks are still obese and unwilling to diet; and they have enough money to influence the political leadership, at will.   

     It is time we put an end to the ugly bank tails wagging us all, just because they sit on pots of money.  After all, it’s OUR money.   

* What is the Appropriate Size of the Banking System? Dirk Schoenmaker, Dewi Werkhoven, Duisenberg School of Finance, October 2012.