American taxpayers are – in various ways – stabilized the US financial system by putting equity into a host of troubled banks, lending liquidity constrained banks a lot of money and guaranteeing a decent fraction of the banking system’s liabilities. And there is still a lot of uncertainly about the ultimate cost to the taxpayer of all these policies, as the “true” state of the banks’ balance sheet isn’t yet known – and in some sense cannot be known, as the cash flows underlying a host of financial assets themselves are a function of the economy.*
I though was struck my something else. Data on the US banks seems to miss a large chunk of the US banking system.
Total liabilities of US banks, according to Zero hedge, are close to $12 trillion.
The dollar liabilities of Europe’s banks are – according to the BIS -- about $8 trillion. UK banks alone had a gross dollar balance sheet of close to $2 trillion. For details, see the charts on p. 2 and p. 51 of the latest BIS quarterly.
There may be some double counting. And European banks make dollar loans to non-US borrowers, so they aren’t just lending in dollars to the US. But the data – on face value, without any adjustment – suggests that US banks might only account for only about 60% of the aggregate dollar balance sheet of the world’s commercial banks.
But the Fed’s flow of funds data suggests that there isn’t a lot of double counting. The liabilities of US-charted banks at the end of q4 totaled $9.9 trillion, with US bank holding companies accounting for an additional trillion dollars of debt. Foreign banking offices in the US had by contrast $1.6 trillion in liabilities (see tables L 110-112), far less than the $8 trillion in dollar balance sheet of the European banks.** There is little doubt that many of the world’s large dollar balance sheets aren’t regulated by the US – and aren’t going to be bailed out by the US taxpayer.
At least not directly.
The US did, though the Fed’s swap lines, provide Europe’s banks with dollar liquidity. But it did so by providing Europe’s central banks with dollars, dollars that were then onlent to European banks. US provided the dollar liquidity, but all the downside risk resided with European governments.
And the US also indirectly bailed out some European banks by bailing out AIG, and thus assuring that AIG would be able to honor the insurance it sold to the world’s banks. But European governments have also bailed out a host of European banks that made bad bets on “toxic” US assets. Absent those bailouts, European banks would have had to dump a lot of US debt – driving the price of that debt down and threatening the health of a host of US financial institutions that hold similar stuff on their balance sheets. Europeans taxpayers have indirectly helped to bail out American banks too.
The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“
My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.
* Gillian Tett’s analysis of the difficulties (a Sisyphean task ) of removing “toxic’ assets from banks’ balance sheets is worth reading.
** The BIS data is through q3, while the Fed’s flow of funds data is through q4. At the end of q3 foreign banking offices in the US only had $1.24 trillion in US liabilities. They clearly dramatically increased their "onshore" borrowing during the crisis, as they lost access to "offshore" dollar liquidity. I haven’t spent enough time with the BIS data to know whether the $1.24 trillion in onshore liabilities should be subtracted from the $8 trillion (or if the $1.17 trillion in onshore assets of foreign banking offices should be subtracted from the $8 trillion) to avoid double counting. Help on this would be appreciated.