Hello everyone...This is my second post, but I still need to figure out how to upload charts, so this post too will venture in the theoretical / philosophical sphere. I hope you don't get bored...
So, here it goes. One of the issues that got heavily mentioned as problematic during talks about Ireland was the fact that the size of the country's banking sector was a multiple of the size of its GDP. But was that really the problem ? The same argument has been made about Iceland and it can also be made about other European countries as well. I think Austria and Cyprus fit the bill and probably Switzerland, but I don't have a figure in mind for the Swiss so I'll leave them out for the time being.
You noticed that only small countries got mentioned. Well, that's the concensus right now, but that is simply wrong. The same goes about the UK and France for sure and I'm sure for many of the rest of the large European sovereigns as well. Yet everybody tend to make more noise about small countries right now since talk about banking sectors of larger countries has ceased, at least that's the impression I got. The reason could be that markets focus on the weaker links of a chain first. That does not necessarily mean that the banking sectors of smaller countries are weaker (although that was exactly the case in Ireland) but that their sovereigns are weaker than larger sovereigns. If contagion gets to the larger sovereigns then this could be the endgame or it could signal that time for more drastic measures (i.e. debt monetization) has come. But now I'm straying from my point...
To get back to it, it is like the reason that Iceland's banks went bankrupt was just that the size of their consolidated balance sheet was larger than the country's GDP. Of course that makes bailing out the sector harder or even impossible or if you prefer, undesirable. But not all cases are the same. If the said expansion of the banks' balance sheets was solely inward (meaning inside their home-country's borders) then that's surely highly problematic, since there is a limit to the amount of debt a household or corporate entity can take up and actually service. What about the case though, that a small country's banks expand offshore pretty sensibly, with cheap funding sources (deposits), low loans / deposits ratios and a conservative business model that gives priority to limit risk and prevent reckless credit expansion ? Would that be a reason to worry too ? If the answer to that question is yes, then banking sectors of smaller countries are condemned to remain small forever...
I know that this is a pretty theoretical (and as the crisis proved, nonexistent) case but that's the point I want to make. The problem, for aforementioned banking sectors, is not overseas expansion per se but reckless credit expansion, over-reliance to wholesale funding (which as we all have witnessed during the present crisis can vaporise overnight) and greed. They simply wanted to do everything overnight, but in order to build an empire, especially if you come from a small country, you have to be patient. It always comes back to the flaws of human nature, doesn't it ?
p.s. I think that a large banking sector provided that it is not overextended and individual banks have maintained sound lending standards can sustain the rise in NPLs (non - performing loans) associated with a typican downturn without requiring the state to step in to bail it out.
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