What does bank recapitalisation mean? An exchange with Joseph Halevi

In reaction to my Le Monde piece, Joseph Halevi (my close friend and co-author) send me an email, regarding the meaning of bank re-capitalisation, that started as short exchange which you, dear reader, may find of interest. Any comments?

Joseph Halevi: I have a big difficulty in understanding what bank re-capitalisation is and means. I can understand what it means for a productive firm: raising capital through equity (stocks) or through undistributed earnings, but a bank? Firstly, money is created by the bank itself. Secondly in the end, whether in a productive firm or in a bank, capitalisation means money tied up in  assets as opposed to debt. Thus when Roosevelt “recapitalised” the banks he simply took over their shares, injected (i.e. gave) new money to the banks under new management rules, swapped (whenever possible) old for new stocks and that was it. In other words, it all boils down to giving money to banks. A similar situation happened in Italy in the 1930s only more drastically: they were nationalised, hence recapitalised not because they were  more successful business wise but because they belonged to the State and the State guaranteed for them; that is, it covered all their losses and gave them additional monies. Thus outside the pseudo technical jargon of bank economics, recapitalisation means giving money to the banks. Since money is liquidity to begin with, banks should be required to use the money they get from the ECB to build up assets. The problem is that there aren’t any assets around which are safe except very low yielding US treasury bills, UK bonds, Japanese zero yielding bonds and über-alles low yielding bunds. Hence they cannot be recapitalised unless nationalised, then they can get safely all the money they need from the State, assuming the State has power of issuing as much money as it requires. Thus in the eurozone the problem is not the recapitalisation of the banks which can be done by fiat but the impossibility of doing it by fiat because the States do not have the power to generate and direct the money where they want or need to. 

Yanis Varoufakis: You hit the nail on the head Joseph. What bankrupt banks need is money to keep the ATMs functional, at the very minimum, and, hopefully, start lending again. Since the Crisis began in the Eurozone, which effectively bankrupted the banks (as a result of their über-stupid leveraging, lending and investing in toxic assets pre-2008 behaviour), they have been constantly kept on a drip-feed by the ECB. The latest LTRO is simply a turbo-charged version of this type of liquidity-provision. However, the problem with such liquidity drip-feeding (or even massive injections a la LTRO) is that the money banks receive comes in the form of loans. The ECB effectively lends them that money on the basis of collateral (e.g. bonds, mortgages etc.). Given that (a) the banks have run out of collateral and (b) everyone knows that they simply cannot repay the ECB, they are sinking deeper and deeper into a zombie-like state. In this sense, the issue here is how to give them more money that they do not have to give back – and without having to post collateral (which they no longer possess). This is what we mean by recapitalisation!

What the bankers would like is for recapitalisation to proceed with no strings attached. That is, without having to hand over to society equity (i.e. common shares) in return for the money they get. In short, they are struggling to convince politicians to NOT do what Roosevelt (or the Swedes in 1992 for that matter) did. They want to have their cake and eat it! It is imperative that every decent human being mobilises to stop them from getting their way.

As you say, the only way of recapitalising them without effectively handing the bankers who bankrupted their banks a blank cheque (signed by those who are paying the cost of the Crisis that the bankers created), is to nationalise their banks (or, at least, for the state to take equity in proportion to the money it hands over to the banks). But, again as you say, in the Eurozone there is no state that can do this. I disagree. Since the money comes from the EFSF (which borrows it on behalf of the whole of the  Eurozone), it is the EFSF that should receive the banks’ shares. In conjunction with the European Banking Authority and the ECB, they can then appoint new Boards of Directors, nurture the banks back to health and, finally, (when the time is right) re-sell these shares in the international money markets to re-pay the Eurozone’s citizens for the whole operation of cleansing the banking sector. This is precisely what Policy 1 of our Modest Proposal suggests.

Joseph Halevi: I agree with you. As for the EU, they give themselves institutions that could potentially act on a European wide basis but do not empower them and do not nominate directors that could act in that way. The whole thing boils down, in Europe, to the relation between the State and Capital. Actually labour, everywhere in Europe, is more willing to go on a European footing, perhaps less in Germany where the Unions, also the leftwing IG Metall, are tied to neomercantilism. The issue is European Capital. They want Europe as a free hunting ground, as guarantor of financial rents, as the enforcer, especially in the Eurozone, of wage deflation and the shifting competition onto the working populations who have to compete against each other. But EU Capital((s) do not want to let go of their own states. They view their own states as their protectors and as the instruments  for struggling at the EU level. Elementary Marxism!


  • Very interesting facts from both of you. What i found quite useful to know, is the simplified presentation of what ”re-capitalisation” actually means. Does that mean that recapitalisation is just a vicious circle where banks cannot pay back efficiently their debt? Arent the banks supposed to use their liquidity to reboot the national economy through loans?

    • I do not undrestand what the prequisites are for individuals to be able to establish a bank. Is it a prerequisite to have a fortune,to be solvent (how much?)or it is more important to have cosy relations with the political elite?

    • Banks are capital constrained when it comes to giving loans.Switching their assets (such as gvt securities) for more liquid assets (such as reserves) does not alter their ability to lend either for the better or for the worse.Thats why QE didnt really work as expected let alone wasnt inflationary.Thats also why without recapitalisation they cant help the economy.

    • Xenos:

      Because we deal with undisputed facts not subject to loose interpretations.

      1. When the Greek banks were initially approached for a “voluntary” (nothing but) haircut at 23% last July 2011, which then grew to 50% by November and ended up at 73% on a NPV basis this March, obviously the banks agreed to participate in such political charade subject to a subsequent recapitalization adequate to restore their Tier 1 capital thresholds( which were notoriously violated by the fabricated PSI)

      2. Therefore, one can not count taking away 85 billion euros from the Greek banks as voluntary, and then claim that 50 euro of recap capital is now public money. It’s absurd to claim that the savage haircut was all private and the subsequent restoration is public. This violates every logical principle known to man. Obviously both the debit and subsequent credit accounting entries were part of the same deal. The banks wouldn’t have accepted the first part without the second. It’s part of one inseparable transaction not subject to political abuse.

      3. Furthermore, it’s absolutely naive to claim the latest recap infusion of 18 billion as public money. Where is the public part? This is not Greek money at all. It’s all ECB money. The initial 85 billion taken away from the banks and pension plans was all pure Greek money destroyed at the whim of political foolishness. What come back is capital from a completely different source and for the sole purpose of playing Merkel’s theater that somehow she exacted a great victory against the “greedy banks” which was all for show. The substance of the transaction speaks otherwise. It was part of a negotiated deal, period. If you don’t like the deal then you shouldn’t have gone through with it. (which I would have preferred by the way).

      4. Finally the part about exchanging stock and exerting influence in the selection of bank boards is beyond moronic. It’s absolutely laughable. This is Greece we are talking about. The same Greece that has been asked to shrink her public sector through the sales of 50 Bil. or so of public assets. So, instead of shrinking the sector you want to augment it? Pleeeeeeeeeeeeease. And on top of it give to a class of certifiable political ignoramuses and out-of-depth bureaucrats supervisory authority over an industry that has lost 98% of value already? What for? so that the recovery of the lost 98% is delayed into perpetuity? And all of this because some amateurs want to show that they “control” the banking system? What system? there is nothing left! Does controlling smoldering ashes count as control? This is beyond laughable. It simply is a very stupid idea and automatically discredits anyone who for ideological reasons feels the urge to propagate such nonsense.

  • “how to give them more money that they do not have to give back – and without having to post collateral (which they no longer possess). This is what we mean by recapitalisation!”

    This is what I call a free lunch. Give them banksters even more money, free of charge, so they can continue to pay big salaries and destroy the real economy? No way. I would let them all go bust, and just use tax money to protect the deposits.

    “It is imperative that every decent human being mobilises to stop them from getting their way.”

    Here I fully agree with you, which is a rarity 🙂

    “Since the money comes from the EFSF (which borrows it on behalf of the whole of the Eurozone), it is the EFSF that should receive the banks’ shares. ”

    This is not part of the EFSF (and ESM) mandate, and can’t be because it would require to re-negotiate this mandate. Please stick to the binding contracts.

    We all have seen that the refusal to do so, for instance with regard to the EU treaties by France and Germany around 2005 and then again during the finance industry crisis, by Greece ever, by Portugal…. led to desaster. Pacta sunt servanda should become the standard again.

    • “Pacta sunt servanda”

      Ofcourse you would say that now that your country has the power to do what ever she likes. Breaking her own rules.

    • I like this quote. Why aren’t people going to jail over this?


      “Now, I have a question for the FBI, SEC and all government agencies…… IF a person sold and got millions/billions by pretending to have something for sale and they did not – is that not embezzlement and fraud? Would you not lock that person up for a felony for the rest of their lives?

      How come Wall Street can Lie, commit absolute obvious Fraud, trade on things they pretend they have but don’t? How come they never have to pay or go to jail for what is in fact Stealing?”

    • fotis

      Most of them are not Greeks.
      If they were ,it would be their fault.

  • “Firstly, money is created by the bank itself.”

    Yes but banks “create money” as long as their capital allows that,based on the basel rules.They cant create net financial wealth as the argument implies (or maybe i misunderstand the point of this argument?),since all money created (which is actually loans) consists of an asset and a corresponding liability.All loans (money created) net out to zero except for the interest ofcourse.

    “Thus in the eurozone the problem is not the recapitalisation of the banks which can be done by fiat but the impossibility of doing it by fiat because the States do not have the power to generate and direct the money where they want or need to. ”

    Spot on.Hell,thats the reason we cant solve the sovereign debt problem too!

    Interesting discussion.

  • Another way of looking at this is to note that banks and financial institutions — in line with the neoliberal political agenda of the west in the last three decades — were allowed to do as they like, more or less. Free markets. They have failed miserably. The only recourse is for state intervention of one sort or another to save the banking system. Recapitalisation could take one of three forms: handing state monies over to banks just to save them, state investment (and effectively part-ownership) of private banks, or nationalisation of banks that cannot survive in free market conditions. (I also note a fourth option that you have suggested elsewhere, of forced European bank mergers such that few national banks would exist. Although this follows a European integrationist logic, I doubt that it is politically acceptable at this time.)

    The first option (as you say, favoured by the banks) is politically unacceptable. In a way, this is what Merkel is trying to do by sleight of hand. The second is the most likely (as the UK has done); the third is less likely, but possible with a reconfiguration of politics. What should be clear from my discussion (and is not from yours) is that the choice should be made democratically and figure prominently in political parties’ manifestos. The fact that it is not indicates that currently politics is failing to provide any democratic legitimacy for the actions of governments in handling their economies. This, if it continues, will be the biggest crisis of democracy since world war II.

    • “the choice should be made democratically and figure prominently in political parties’ manifestos. The fact that it is not indicates that currently politics is failing to provide any democratic legitimacy for the actions of governments in handling their economies. This, if it continues, will be the biggest crisis of democracy since world war II. ”

      I agree absolutely.
      In the current greek elections NO party is discussing economic policy.

      Obviously no politician is capable of discussing economics, but the economists on their teams (assuming they have such) should be pushing hard for this.

      Please, greek economists on this site / comment list – GET ACTIVE!!!!!

  • I think that Modest Proposal’ s Policy 1 about bank recapitalisation aims to solve the problem that the insolvent states cannot actually “give money” to their private banks (because they cannot borrow it from the markets or print it) in a way that (a) doesn’s add debt to them (b) doesn’t transfer the cost to the taxpayers of the surplus states (c) as a result keeps the “european ideal” alive, avertiting the dominance of Hate among the nations (German vs Greek) or the individuals (Greek vs Greek and German vs German), a factor that sadly is completely neglected by european leaders.

  • Dear Yanis,

    As I’m sure you agree, bank recapitalization isn’t about keeping the ATM’s running, or support any form of credit expansion via liquidity provisions. It’s about making the Greek banks solvent once again by Basel II standards and deal with their funding gap. After the PSI+ deal and the Blackrock due diligence exercise, the impairment of GGBs and the need for additional provisions for their loan portfolios had a dramatic impact on their regulatory capital. I’m sure you share the notion that not a single euro of the recapitalization funds will find its way to the Greek economy.

    At the end of the day, it’s all about supporting the flawed structure of the European banking sector, that in prosperous times was so eager to tie -with a Gordian knot- a rock around its neck, courtesy of a pan-European settlement system (Target2). It’s also about securing future loss absorption capabilities that are bound to take place, in a banking sector currently dealing with an unsustainable leverage ratio combined with expectations for further asset depreciations.

  • Recapitalisation just seems futile though?

    Same people in control of the same system with the same outcomes after their banks are restored to health.

    Debt Jubilee – the music has stopped and there aren’t enough chairs. The money lenders should be left standing.

  • What is this obsession with re-selling nationalized assets?

    If banks make profits and provide essential services, why should we allow private companies to mess it up and vomit all over the economy?

    • Good point. I would not re-sell them. But, in order to avoid the accusation that I am proposing the nationalisation of banking, I point out the simple fact that others have in the past recapitalised banks via public ownership and then privatised them again.

  • The bankers MUST lose their banks.
    I’ts not a matter of social justice or whatever, it’s a matter of moral hazard.
    In the period between 2000-2008 greek bankers got greedy and quadrupled their loans to businesses and households.
    We got credit cards mailed to us without having asked for them, we got mortgages at 130% of the value of the house, we got loans to bankrupt media organisations, we got loans for holidays, we got bank reps telling us how viable it is to borrow 200k on a 1k per month salary.
    You name it we got it.
    Banks failed miserably in their role as responsible lenders, and if the country ever gets out of this mess, what’s to stop them from doing it again?


    We dont want to force bankers to pay their own deficits? I disagree but thats fine.
    We want to socialise their losses in order to keep the ATMs full? thats fine too, at this stage we have no option.
    We want to fix the banks and give them back to the bankers? whatever, let the elected Govt cross that bridge when they get to it.

    But we MUST socialise banks at least once, to send a clear message:
    you screw up -> you get caught out -> you lose your shop.
    simple as that.

    Othwerwise history will simply repeat itself, our kids will see the same vicious circle:
    credit expansion -> bublegum GDP -> national happiness -> brick wall.

    • “You name it we got it.”

      You were not forced to sign any of these credit porposals. It was your free will, no?

      “Banks failed miserably in their role as responsible lenders”

      What about the role as responsible customers who just can say ‘no’ instead of living beyond one’s means on borrowed money?

      As for the role of the banks and other players in the fnance ‘industry’; I agree completely that they as well were (and still are) completely irresponsible and anti-social. In Greece, in Germany, in Spain, the USA – everywhere! That the banks all over the planet were saved by the taxpaers only recently, in the aftermath of the Lehman crash, was -from my point of vie- the biggest mistake of all. To big to fail? Not at all. It is just a matter of what laws a country creates for such a case.

      Plus there should be much tougher regulations, there should be a Tobin tax, there should be much higher equity rate, a much lower leverage…. Unfortunately, the banks hold the nations hostage and more or less dictate the governments what they are allowed to do.

      I’d like to see a not so modest proposal which shifts the burden of cleaning up the mess from the people to the finance industrie’s beneficiares.

    • @vss

      You still do not get the problem. Or do you?

      The real problem is not only the private/household debt in Greece but the fact that ALL banks in the world overleveraged in EVERY investment.
      We Greeks are called to pay not our personal debts ,but EVERYTHING.

      Their corruption is not our corruption.

      They ask two kinds of reforms.

      1. The state reforms.
      We agree. These reforms we ask for decades. Smaller public sector. Less bureaucracy. Privatization or simply closing public companies that are parasitic. Cutting the budget for others.
      When we heard the troika asks for these ,we were happy. Most of us.
      Also it was weird ,because it was them that wanted the state to function as such. Many corrupted deals with the Greek state were possible because of these companys. Anyway ,we said maybe things will change. BUT…..

      2. Arbitrary illogical economic assurances
      Privatizations of effective and fully functional national companies.
      Power ,water etc. To sell them 1/10 of their value ,without their true value having fallen that much even during the crisis.
      Not asking for loans others owe to us. And the most important ,Concession of sovereignty.
      All these with levels of bebt not at all different than yours.

      With the Second Memorandum ,Greece does not get money anyway.
      Even if it did ,it has nothing to do with all that debt that now exists and the reforms asked.Because that debt (money received) does not support reforms anyway.
      Most of it went to banks ,a lot to buy military equipment from Germany and France (??????????????) and what remained for the usual of Greece.

      But we pay the interest and more debt is pilling up.

      And all these started with negative propaganda ,that is far more worse than the truth. This ,as a distraction for the rest of the world.

      They hide behind state reforms (which are a must anyway) ,to get the rest. To get them as a bargain ,while bailing out their own banks.

      Bailing out the system is the true priority.

      Do you see it?
      Can you see it?
      Do you want to see it?

    • “The bankers MUST lose their banks.”

      The owners are not bankers. The bankers run the banks.

    • @ Demetris

      You adress explicitly me. But your comment has no context whatsoever with what I wrote. So I have no idea why you adress me with your copy & paste stuff. Probalby an error on your side.

    • All right, to answer a question.
      Borrower’s responsibility (households): sure, absolutely, people must be accountable for their loans!
      But lets be realistic here. Most these people are not sophisticated investors, they are just your average mum and dad who are counting on professionals to provide some guidance.
      It’s the banks who are the technocrats, who have the market insights, the kids with the laptops and the MBAs, it is them who must sit their customers down and make them do a realistic budget with their expenses and income, and allow for market changes and personal circumstance changes.
      In writing. And then someone should sign off on it, and then someone else should sign off on it, and then someone should audit it, and the central bank should regulate it.
      And when you see things like credit cards mailed to people, someone in the dept of justice should take over.
      None of that happened and there are no excuses. Customers are what they are, and until they start teaching personal finance at school someone else must put their foor on the brake.

      Corporate lending is a different story, there we are talking about fraud and/or serious conflict of interest.
      Example: DOL (ΔΟΛ, mega channel etc) is as bankrupt a media corporation as you can imagine, they make massive losses every year to the point of group net assets turning negative.
      Under any Company Law (apart from the greek one apparently) it should have been shut down ages ago.
      And yet someone ALWAYS lends them in the last minute and pulls them out of the lurch. In 2011 it was First Bank, who essentially are owned by the State via Agrotiki Bank.
      And then you look at the BOD of DOL and First Bank and you see the same people in both. WTF?
      These are listed companies and all that info is publicly available, what is the Stock Echange Commission doing?
      This is a corporation that influences peoples’ opinions, what is hiding behind all that, where is the transparency and justice?

      And when the whole system falls apart, what do we do? The central bank sits down with the ECB and the IMF (two other banks) and decide to call in another bank (blackrock), who has investments in our banks, to audit what?
      The banks it has investments in!
      And report back to the PM, who was also a banker himself, and refuses to disclose the audit findings, even though they are used to calculate the next loan that we have to take and burden 5 generations down.
      I mean seriously, how many conflicts of interest can you count here?

      People keep telling that it’s not that bad, because Greek households and companies are not as indebted as european ones.
      Well, what we seem to forget is that this is not europe, this is the balkans, and we simply dont have the culture, infrastructure, checks, balances, reprimands and transparency required to service and sustain such massive private loan levels.
      And yet we chose to hide this fact behind GDP growth, because everybody knows that lending creates transactions, which generates GDP growth. Bubblegum growth.

    • vss

      Is that the best you can do?
      You wrote about people signing for credit.
      That is the context.

      And i sure am not the one who copys and pastes.

    • spyro

      Good post.
      “And yet we chose to hide this fact behind GDP growth, because everybody knows that lending creates transactions, which generates GDP growth. Bubblegum growth.”

      Here we do not want to hide anything. The people.
      This is why we need true reforms ,not the excuses of the european leaders to save their banks.

      Different things.

  • Can you please comment on the recapitalization of Marfin Laiki Bank. How can it be done since the Cyprus State doesn’t have the capacity to do it?

    • I am not sure. But I suspect that Marfin is also registered in Greece as a Greek, not as a Cypriot bank. Which would explain the capital injection via the Greek FSF.

    • Since 1/4/2011, Marfin Egnatia Bank is actually considered a branch of “Cyprus Popular Bank Public Co LTD”, member of Laiki Bank Group. It’s a Cypriot bank and the recent recapitalization was performed by the Cypriot state which in turn now owns and runs the bank.

    • @FionaKabuki

      There are certain constrains according to the Basel Accord.They must meet certain capital to risk weighed assets ratios before they are able to expand their balance sheets by giving new loans.

      See more in detail here: http://en.wikipedia.org/wiki/Basel_III

  • I wish i could recapitalize my private company like all the major bankers do for their “private” companies.

  • I cannot understand why our politicians and economists don’t let our banks fall. I mean, what do you think it is the best option: pay the bankers until the system explodes or warrant the clients deposits and let the banks assume their responsibility in a free market?