The rescue of ailing banks makes the hair of financial veteran Mohamed El-Erian stand on end. He is particularly annoyed by coup-like actions by a powerful institution.
Banks with more than $530 billion in assets have gone bankrupt this year in the US. Adjusted for inflation, this total exceeds the figure for 2008, at the time of the global financial crisis.
So the bank quake is immense. However, the first phase is probably over, in which sudden and massive outflows of deposits from poorly managed and insufficiently supervised banks led to spectacular collapses.
Danger of wildfire
The current second phase is about keeping less problematic banks that are suffering from the increased financing costs stable. If this does not succeed, the banking crisis will spread to other sectors in a third phase and cause considerable economic damage.
How such a large-scale economic crisis can be prevented Mohamed El-Erian in an op-ed in the British newspaper on Wednesday «Financial Times» (Article subject to a charge) portrayed.
authorities have an obligation
According to the former investment manager of the fund house Pimco, the bank bodies must first pay more attention to their statements and generally communicate with investors very quickly. El-Erian also sees the need for the US Federal Reserve to strengthen its supervisory system.
Thirdly, he recommends that bank settlements by private and public authorities must work within a tighter timeframe. Finally, the public sector must reassure the markets that, instead of the ad hoc approaches that have prevailed so far, it is revising both the deposit insurance system and the regulation of banks, which are wrongly classified as not systemically dangerous.
Reach into the bag of tricks
The previous stabilization measures are not enough even for the investment legend. The American Federal Reserve, in particular, gets a bad deal from El-Erian: It simply used a trick by signaling that the upper limit of $250,000 of the state guarantee for individual deposits would be replaced by unlimited coverage without changing the law.
In addition, the Fed has opened a funding window that allows banks to swap securities at par for a year that are worth significantly less on the market.
Signal for imitators
In fact, this subsidized financing of the banking system does not only result in collateral damage in the financial system. Misincentives are also being created that could tempt other financial centers to tolerate or even encourage such harmful activities.