Sonntag, 16. Juni 2013

Are we living in a world without alternatives?


Japans bank bail out failed. So, what is left in a world without alternatives?
You are right! Bank bail in! Here it comes:
 "I welcome the substantial assistance in Japan's legislation to repair its troubled banking system," declared President Clinton this weekend. But what exactly have the Japanese done? Some press reports suggest that the most important part of the package - the injection of capital into the biggest banks - will face trouble, because the banks themselves do not want the money. I have been trying to understand all this, and offer the following illustrative example.Imagine a bank with 105 billion yen in deposits, whose assets consist of loans with a face value of 115 billion yen. (Yes, Japanese banks have stocks and land as well, but this will not change the principle). Unfortunately, many of these loans are of doubtful quality. Let's suppose that there is a 50 percent chance that Japan's economy will improve, and all the loans will be repaid; but there is also a 50 percent chance that the bank will get only 85 billion yen.In terms of expected value, this bank is insolvent - it has a net worth of minus 5 billion. But its stock will have a positive value, which is essentially due to the deposit insurance "put". Ignoring risk premia, the value of the stock will be 0.5(115-105) = 5 billion yen."
"Japan's Financial Services Agency will enact new rules that will forced failed bank losses on investors, if needed, via a mechanism known as a "bail-in," according to The Nikkei. Mitsubishi UFJ (MTU), Mizuho Financial (MFG) and Sumitomo Mitsui (SMFG) are among those proposing amendments to allow them to issue the types of preferred shares or subordinated bonds that would be used in such cases, the report noted."

Sapere Aude!

Georg Trappe

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