Category Archives: regulation

Italy, EU, and Bank Bailouts

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In a Wall Street Journal piece about Italy’s banks in general, are these two items that illustrate both the Nanny State nature of Italy and the cultural differences in attitudes toward personal responsibility among the various constituent nations of the EU.  The backdrop includes the EU’s rule, enacted in 2014, that requires banks across the EU that face bankruptcy to have the banks’ stakeholders (as the WSJ calls them)—shareholders, bond holders, and depositors (but only some of those last…)—to take the losses first and foremost.  The backdrop also includes the trouble Italy’s banks, in particular, are in:

17% of banks’ loans are sour. That is nearly 10 times the level in the US, where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

What to do, then?

The Italian government has sought EU permission to inject €40 billion [$52 billion] into its banks to stabilize the system.
…
Rome argues that bending this rule would be a small price to pay for erecting a firewall against possible bank contagion stemming from Brexit.

Because those responsible for a bank’s business strait shouldn’t have to bear the burden—taxpayers should have to pony up, too.

Rome has criticized the EU’s new banking regime and doesn’t want to use “bail-in” rules that prescribe the order in which stakeholders must bear losses for winding down an ailing bank, in part because of the peculiarities of the Italian banking system. About €187 billion of bank bonds are in the hands of retail investors, whose holdings would be wiped out by a bank resolution under the new rules.

Because personal responsibility—on the part of everyone in the society—should be waivable at convenience.

Other nations of the EU—Germany, for instance—demur from this exception-making and from this walking-away from responsibility of those involved.  Germany’s Chancellor Angela Merkel, referring to that 2014 rule:

We worked to set down certain rules about bank resolution and bank recapitalization. We can’t do everything again every two years.

Stick to the rules and hold those stakeholders responsible—as they are—in other words.

Add to this, the Italian government’s direct responsibility for a failing system of handling bankruptcy:

One reason for the low valuations [of bad loans] is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.

This sort of basic difference on the nature of responsibility is a major part of why the EU as its comported will fail, and it’s the sort of thing that underlies Great Britain’s citizens’ decision to Leave.

Computers Sentencing Humans

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The Wisconsin Supreme Court is considering exactly that.

The state’s highest court is set to rule on whether such algorithms, known as risk assessments, violate due process and discriminate against men when judges rely on them in sentencing.

No.  Even when sentencing a criminal, where his crime is substantially similar to other criminals’ crimes, the key is that substantial part.  No two crimes really are alike, no two criminals really are identical, even the criminal convicted today is not the same man he was when he was convicted—even of a substantially similar crime yesterday—history has happened.  One size cannot fit all, even here; sentencing must be unique.

And that sentence must be handed down by a judge or, in many jurisdictions (and my personal favorite), a jury.  It takes a human to assess the man, and it especially takes a human to assess his likelihood of recidivism or rehabilitation.  It takes a human, or a collection of us, to assess the man’s potential redeemability and his likelihood of redemption.

Computers have none of the comprehension, conscience, intuition, or moral capacity that are so critical to such judgments.  Even a computer’s risk assessment must be suspect, as the inputs cannot include everything a human or that collection of humans that is a jury sees when they assess the man’s record and look into the eyes of the man standing before them.

Aside from the principle of the question, the particular tool in question in the case before the Wisconsin Court is badly flawed.

…a widely used tool called COMPAS, or Correctional Offender Management Profiling for Alternative Sanctions, a 137-question test that covers criminal and parole history, age, employment status, social life, education level, community ties, drug use, and beliefs.

The assessment includes queries like, “Did a parent figure who raised you ever have a drug or alcohol problem?” and “Do you feel that the things you do are boring or dull?”  Scores are generated by comparing an offender’s characteristics to a representative criminal population of the same sex.

Tests, questionnaires, surveys, and the like are extremely easy to game, and any lawyer worthy of his pro bono fee is fully capable of coaching his client to game this one.

Computers shouldn’t sentence humans; humans should sentence humans.  And it shouldn’t be done on the basis of input-limited machine-calculated predictions of the future, in any event.  It’s tough to make predictions, especially about the future.

Bank Bail-ins

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But this legacy [of bank financing of trade deals] is now under threat in Europe from new regulation aimed at preventing another bank bailout.

That’s right.  The EU has decided that tools banks use to finance trade agreements between other parties must be regulated by the Know Betters of the European Commission.

The new rules are designed to shield taxpayers from bailing out distressed financial institutions again[.]

“EU authorities” are, as usual, operating from a false premise.  There’s no need for a government entity to bail out, or to avoid bailing out, any bank.  Banks don’t need bailing out.  It’s all right if they fail.  It’s good, in fact, for bad banks (e.g., those otherwise thought to need bailing out) to fail; that’s how dead wood gets got rid of.

It’s really quite simple, for all that government experts have over-complexified the thing.  The way to not to bank bail-outs is to not bail them out.  Let the free market decide a bank’s (or any enterprise’s) fitness to continue operations, and if the market turns thumbs down, let the bank fail.  Full stop.

The Fed’s Rule by Fiat

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Federal Reserve officials strongly signaled they will be toughening big-bank capital requirements even further than they have since the 2008 crisis, a move that will further increase pressure on the largest US banks to consider shrinking.

Fed governors Daniel Tarullo and Jerome Powell, in separate public comments Thursday, said the Fed will require eight of the largest US banks to maintain even more capital to pass the central bank’s annual “stress tests.”

Notice that they’re acting by rule and moving sharply away from their knitting, which is to concern themselves with maintaining price stability and full employment.  With this rule, they’re nakedly broadening their interference in the free market place.

Here’s Tarullo:

“Effectively this will be a significant increase in capital,” Mr Tarullo said on Bloomberg television.  He recently said in an interview that he expected big banks to have to change their size, organization, or business model in response to the Fed’s regulatory moves.

Never mind that a business’ size, organization, or business model are solely the decision of the business’ owners—private citizen shareholders—and not the interest of any government in a truly free market economy.

Here’s Powell:

“I have not reached any conclusion that a particular bank needs to be broken up or anything like that,” he said.  The point is to “raise capital requirements to the point at which it becomes a question that banks have to ask themselves.”

This is disingenuous.  When it’s government rather than owners forcing the question onto a business, it’s government dictating the answer.  Especially when using this sort of tool for the forcing.  Capital requirements and associated risk handling are solely the decision of the business’ owners—private citizen shareholders—and not the interest of any government in a truly free market economy.  Assessment of the outcomes of those decisions are solely the province of the business’ owners, customers, and a free market; they are no concern of government.

Of course these two and their fellow Fed Governors know this.  The move, though, is consonant with the Left’s general move toward ever larger government with ever larger intrusions into private affairs, driven by their ideology that Government is the answer, and where it fails the proper corrective action is to increase Government.

A British Exit from the EU

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There’s an aspect of so what to the question: what would actually change if the Brits vote to go their own way in a few weeks?  One set of answers involves British influence on the continent or within the EU.

[I]f the British do vote for Brexit and then have to trade with the EU, the UK would in fact find itself isolated with very little influence over regulatory standards in the single market.

Great Britain already has very little influence over those regulatory standards: look, for instance, at the hue and cry from the rest of the EU over how the British comport themselves, and regulate others, in London’s financial markets.  Also, from outside, the British would be utterly free to set their own market regulatory standards without interference or “help” from their Continental betters.

It’s the same with welfare programs and immigration generally.  Although the British do fare quite a bit better here—as part of British Prime Minister David Cameron’s pre-British exit (Prexit?) negotiations with the EU, he won concessions (not enough, some would say) regarding the amount of British welfare payments would be paid to migrant (not immigrant) workers and their stay-at-home (country) families.  But the French already are up in arms over English impertinence at not letting immigrant/refugees to flow across the channel quickly enough to suit France.

Neither of those problems would be any worse with a British exit, and the British would be in absolute control over them were they to go their own way.

The upshot looks as though there is, indeed, a what to the so what—and it favors a British exit from the EU.  Which, in addition to giving Great Britain a great deal more flexibility and complete national sovereignty, would restore the British to their historical role of power broker among hegemon wannabes on the continent.

That last isn’t all bad for the British or for the continent.