Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

More Banking Blackmail Fun

The Daily Mail merrily repeats a story which is patently untrue:

Britain could be hit with losses of up to £366 billion from the collapse of the Greek economy, it has emerged. Ministers had claimed that British banks have ‘only’ £2.5 billion of exposure to Greek government debt, while the Bank of England says the potential losses would be just £8 billion.

But experts last night said that UK financial institutions are in far more danger than previously thought, because banks are tied up in complicated derivatives and insurance deals. They warned that if Greece defaults on its debts the crisis could cause a series of dominoes to fall, with Portugal, Spain and Ireland heading to the wall in turn…

Ho hum.

The nominal value of all these side bets may well be £336 or £366 billion (the headline and the contents of the article are not consistent), they may well be £3,360 billion or £3,360 quadzillion, but it’s still nothing to worry about. As I’ve said before, beyond a certain level, it’s not proper money any more, it’s just numbers on bits of paper:

1. These banks and financial institutions have all made bets with each other, it is a zero sum game, so even if some banks end up losing a total of £336 billion, other banks will win £336 billion – and I’d assume that most banks have inadvertently made each-way bets because different departments can and do take opposite positions.

2. The total amount that any bank can lose is capped at its total net assets; I guesstimated the total net assets of UK banks (i.e. shares + bonds) at £873 billion last time I looked, so absolute worst case, UK banks have only bet with non-UK banks and they lose every single bet, shareholders and bondholders would lose just under half their capital.

3. Commonsense tells us that if you have assets worth £10,000 and foolishly enter into a £1 million bet which you lose, the maximum you can lose (and the maximum amount which the other person can win) is £10,000, which whittles that £336 billion down even further.

4. Let’s say that Big Bank and Small Bank have entered into such a bet and Big Bank wins – the most extreme outcome is that Small Bank loses everything and, having nothing left to offer, is taken over by Big Bank lock, stock and barrel. So along comes the Monopolies & Mergers Competition and splits them up again, big deal.

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