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Dexia: Nothing New Under the Sun and Financing Failure

Took some time away from blogging recently distracted by a number of issues, including moving back to the US from Kyiv where I had been living for 18 months, transitioning to different clients work-wise and also finalizing a book I have been working on the past two plus years.

It is interesting to see that not much has changed world-wide as far as how central banks and governments around the world continue to panic at the least sign of a potential large bank failure. This week governments were aflutter about Dexia Bank of Belgium as its central bank, as well as the French central bank, are coming to the rescue (http://www.reuters.com/article/2011/10/04/dexia-belgium-cenbank-idUSB5E7KS06420111004).

Dexia Bank is an interesting case for a number of reasons.  First of all, it just received a bailout package three years ago from its government and I guess that went so well that another bailout may be in order. This parallels the well-publicized troubles of Bank of America in recent weeks which had a relapse with its stock back down near 2009 lows. This is after it was bailed out in early 2009 when the Merrill Lynch purchase threatened its long-term viability. I also recall during the 1980s that two of the largest banks in Texas during that period were bailed out and then they ultimately failed a few years later when the bank groups did not bounce back as expected: BancTexas and First City. So the history of bailouts reveals that many times the cure just does not take.  The way the bailout crowd explains it though is that bailouts are an elixir that cures all ills for a bank under stress.

Another interesting issue about Dexia is that just this past summer it went through the so-called “stress tests” by the European Banking Authority. Dexia passed with flying colors with an 11% capital ratio intact, well above the 10% ratio that its regulators had hoped for. This was the procedure that 91 of Europe’s largest banks went through to see how they could withstand the stress of a downturn. Seems the stress test was not so stressful, as it just assumed that sovereign debt would not cause any problems for Dexia. So the post-crisis panacea for addressing future stress of having banking agencies worldwide demand higher capital ratios and then intervene early to avoid bailouts seems to be coming apart before it was even fully implemented.

To loop back to a few of the issues I started with at the beginning of the post, have a look at a recent interview I had with the Wall Street Journal about my forthcoming book Financing Failure: A Century of Bailouts and the Independent Institute’s promotional page that provides a summary and some initial comments on the book itself.

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