Rogue bank to roll dice on government guarantee

[patslatt]

Richard Bruton,Fine Gael spokesman on finance,mentioned the possible risk that a bank with severe loan losses might be tempted to double or quits and roll the dice using the government's new guarantee on loans to banks.

A rogue bank verging on insolvency could legally borrow hundred of millions,even billions, and bet it on futures markets in the hope of making a quick killing. If the bank lost the bet,it wouldn't make much difference to its solvency anyway but a quick killing would help relieve its insolvency. The Irish government would have to cover any losses.

An interesting question is what safeguards if any the Irish government put in place to prevent such rolling of the dice.Do banks have to get the CB's permission before vastly increasing their borrowings? What penalties would apply,if any,if they didn't? Can the CB recruit enough qualified bank auditors to monitor banks for reckless trading on the guarantee? One possibility is to use the existing external auditors which are already familiar with the bank for this monitoring.

The government plans to charge insurance for its loan guarantees,taking over the function of the Credit Default Swaps market. Presumably,it will look at the private market CDS rates for Irish banks before the financial panic drove CDS rates to punitive levels and use those former rates as a guide. In the case of banks made insolvent by imploding property assets,the rate should be set at punitive levels in order to put them into receivership. Propping up terminally weak banks proved to be a disaster in Japan's 1990s banking crisis which caused the loss of a decade of economic growth.

[DeGaulle 2.0]

Richard Bruton,Fine Gael spokesman on finance,mentioned the possible risk that a bank with severe loan losses might be tempted to double or quits and roll the dice using the government's new guarantee on loans to banks.

A rogue bank verging on insolvency could legally borrow hundred of millions,even billions, and bet it on futures markets in the hope of making a quick killing. If the bank lost the bet,it wouldn't make much difference to its solvency anyway but a quick killing would help relieve its insolvency. The Irish government would have to cover any losses.

An interesting question is what safeguards if any the Irish government put in place to prevent such rolling of the dice.Do banks have to get the CB's permission before vastly increasing their borrowings? What penalties would apply,if any,if they didn't?

The government plans to charge insurance for its loan guarantees,taking over the function of the Credit Default Swaps market. Presumably,it will look at the private market CDS rates for Irish banks before the financial panic drove CDS rates to punitive levels and use those former rates as a guide.

I wonder is it possible to make the directors of the banks personally liable for any losses incurred while the guarantee is in force - the idea being that their assets would be seized if they engaged in reckless trading.

[markeys]

Are these the details that the two Brains are to return next week to the Dail with?

[katy brock]

I wonder is it possible to make the directors of the banks personally liable for any losses incurred while the guarantee is in force - the idea being that their assets would be seized if they engaged in reckless trading.

I wish it was but not a hope!
And believe me they know it!

Lenihan is an innocent abroad when it comes to business. His only experience would be as a sole trader(when he was a barrister).

[gulliblepleb]

Better to take a few out of play that have no hope of recovery

[Dreaded_Estate]

I wonder is it possible to make the directors of the banks personally liable for any losses incurred while the guarantee is in force - the idea being that their assets would be seized if they engaged in reckless trading.

Whatever money we recovered from the directors would be a drop in the ocean compared to the amount of money the tax payer would lose.

[blinding]

We should be worried as compulsive gamblers are not easily cured.If they have a ready supply of cash why would they bother to try to control themselves(especially other peoples cash)

[katy brock]

Better to take a few out of play that have no hope of recovery

Exactly. I think it will still happen.

P.S. Possibly three.

[markeys]

The ones that were going to collaspe should be let go. They'll find it hard to survive anyway once they're forced to write down their crazy valuations, and if they don't then in two years when the guarantee expires they'll be crucified by the markets anyway.

But to let them fall now would expose the FF line that it was external factors!