Series: Governments submit to “Too Big to Fail” banks (part 1)

Central Banks lend massively to the banking sector

23 August 2014 by Eric Toussaint

Summary: Since the banking bubble burst in 2007, the major Central Banks of the most industrialised countries lend massively to private banks at very low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
in order to avoid their failure, thus permitting the big banks that take the most advantage to save considerable amounts in interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. payments.

The Fed FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
purchases massive amounts of structured mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
backed securities, although the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
does not purchase these products, it allows banks to deposit them as guarantee (or collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. ) against the loans they grant. The governments also bring their guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). , and inject money, into banks in order to recapitalize them.

The systemically important banks are well aware that in case of problems they are protected by their size, they are “too big to fail” and know they can count on state aid to bail them out whenever necessary.

Governments borrow on financial markets by issuing sovereign debt Sovereign debt Government debts or debts guaranteed by the government. bonds. They entrust the sale of these securities to large private banks. The banks also benefit from lower taxes on profits.
In addition, within the eurozone, banks have the monopoly of credit to the public sector.

Since 2007 Governments and Central Banks of the most industrialized Western countries - hit by the greatest economic crisis since the 1930s - have given top priority to the rescue of private banks and the financial system (insurance companies, mutual funds, private pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, etc.) [1] The bank bailout is done at the expense of the overwhelming majority of the population. The governments have done their utmost to maintain private banks’ main privileges and to keep their power intact. The cost is enormous: explosion of public debt, loss of tax revenues, tight restrictions on loans to households and small businesses, further speculative and adventurous activities, which, in some cases, have required expensive new rescues.

Central Banks lend massively to the banking sector

Since the banking bubble burst in 2007, the major Central Banks of the most industrialized countries (ECB, Bank of England, Fed in the US, National Bank of Switzerland, Bank of Japan) have lent massively to banks in order to avoid failures. Without this source of unlimited credit, a great number of banks would find themselves in payment difficulties, as the usual funding sources declined, the interbank market Interbank market A market reserved for banks where they exchange financial assets among themselves and borrow/lend over the short term. The interbank market is also where the European Central Bank (ECB) intervenes to provide or take back liquidities (management of the money supply to control inflation). had seized up (the banks lost confidence in each other), the sale of banks’ covered bonds became weak, and the money market funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
became erratic. The sum total loaned by Central Banks to the private sector since 2007 is more than $20 trillion. As this has been made available at very low interest rates the big banks have been able to enormously reduce interest repayments.

What are Money Market Money market A short-term market where banks, insurance companies, corporations and States (via the central banks and Treasuries) lend and borrow funds according to their needs. Funds?

Money Market Funds (MMFs) are financial corporations in the United States and Europe, rarely controlled and little subject to regulations as they act without banking licences. They are closely akin to shadow banking. Supposedly the MMFs act with prudence but the reality is very different. This is cause for great concern given the vast quantities of money they handle, and the sharp drop in their profitability since 2008. In the United States, they managed $2.7 trillion in 2012, a significant drop from the $3.8 trillion in 2008. As investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
the MMFs collect capital from investors (banks, pension funds, etc.) and use it to make short-term, often day to day, loans to banks and businesses. During the 2000s MMF financing has become an essential short-term source of liquidities Liquidities The capital an economy or company has available at a given point in time. A lack of liquidities can force a company into liquidation and an economy into recession. for banks. The biggest are Prime Money Market Fund, Created by JP Morgan, the biggest bank in the United States, is worth $115 billion. Wells Fargo the 4th largest bank in the United States has an MMF managing $24 billion. Goldman Sachs the 5th biggest bank controls an MMF worth $25 billion. US banks also operate MMFs in Europe; JP Morgan (€18 billion euros), BlackRock (€11.5 billion), Goldman Sachs (€10 billion), alongside European banks such as BNP Paribas (€7.4 billion), and Deutsche Bank (€11.3 billion). Some MMFs also operate in British pounds. Michel Barnier (European Commissioner for the Internal Market and Services) has announced that he would like regulations to be imposed on this activity, but this is most likely to remain nothing more than a statement of good intentions [2]. The Obama administration is also said to be considering new regulations, to avoid having to bail out a bankrupt MMF with public money.

Moody’s rating agency Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :
has worked out that during the 2007-2009 period 62 MMFs had to be bailed out by the banks and pension funds that had created them, 36 in the US and 26 in Europe for a total cost of $12,1 billion. Between 1980 and 2007 146 MMFs had to be saved by their sponsors. Again according to Moody’s, 20 MMFs were bailed out during 2010-2011 [3]. This shows up to what point they are a menace to the financial system.

Along with direct cash provisions Central Banks have other ways to assist private banks. Between 2008 and 2014 the Fed purchased very large quantities of Mortgage Backed Securities MBS
Mortgage Backed Securities
See ABS.
(MBS), totalling $1.5 trillion [4]. In 2012-2013 it bought up to $40 billion “worth” a month from banks and estate agents [5]. Towards the end of 2013 the Fed started to reduce its purchases, which were no more than $35 billion in March 2014. As of October 2014 the FED will hold $1.7 trillion worth of MBS, about 21% of the total value of this kind of toxic product. [6]

The ECB does not purchase these products but allows banks to deposit them as collateral, that is, as guarantees for the loans they grant. During the 2010-2013 period the “value” of Asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). Backed Securities (ABS ABS
Asset backed security
A generic term designating a security issued by an intermediate entity (SPV) between a transferor and investors in the context of a securitization operation. This security is a bond. When the assets backing these securities (called underlying assets) are made up of mortgage loans like subprime loans, they are called Mortgage Backed Securities (MBS). MBS are subdivided into Residential Mortgage Backed Securities (RMBS), backed by mortgage loans made to private individuals and Commercial Mortgage Backed Securities (CMBS). The term Collateralized Debt Obligations (CDOs) is used when the underlying assets are bonds issued by companies or banks, and Collateralized Loan Obligations (CLOs) when these assets are bank loans.
) on deposit at the ECB varied between €325 billion and €490 billion.

The ECB also purchased covered bonds, issued by private banks to finance their activities [7]. This is a very important assistance by the ECB to the private banks, which, as we have seen, had serious difficulty to find funding on the financial markets. This assistance has quite simply been ignored by the media. Since the beginning of the crisis the ECB has purchased €76 billion of covered bonds, €22 billion on the primary market and €54 billion on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. , including bonds rated as bad as BBB-,which expresses lack of confidence in the issuers. On the 18 March 2014 the ECB held €52 billion “worth” of covered bonds. This is a very large proportion of the total amount of the covered bonds the banks have issued. In 2013 the amount was €166 billion, 50% down in two years [8].

Translation : CADTM

Éric Toussaint, is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège. He is the President of CADTM Belgium (, and sits on the Scientific Council of ATTAC France. He is the co-author, with Damien Millet of Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He is the author of many essays including one on Jacques de Groote entitled Procès d’un homme exemplaire (The Trial of an Exemplary Man), Al Dante, Marseille, 2013, and wrote with Damien Millet, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Politics), Le Seuil, Paris, 2012.


[1In Japan the government and Central Bank did the same when their real estate bubble burst at the beginning of the 1990s . See Daniel Munevar, “Décennies perdues au Japon (lost decades in Japan)”, in Damien Millet and Eric Toussaint, La dette ou la vie (Life or debt), Aden-CADTM, 2011, chapter 15 (in French).

[2Financial Times, « EU shadow banking plan rapped », 26 mars 2012 ; « MMF lose worth in low interest rate world », 10 septembre 2012; « EU abandons reform on money market funds” » 10 mars 2014.

[3Financial Times, « 20 money market funds rescued », 21 octobre 2013.

[4End January 2014 the volume of the Fed’s balance-sheet is over $4 trillion: $2.228 trillion in treasury bonds and $1.586 trillion Mortgage backed securities (MBS).

[5Fannie Mae, Freddie Mac and Ginnie Mae.

[6Since the beginning of the crisis the FED has bought back more than $2.4 trillion of US treasury bonds (in October 2013 the FED held US bonds worth $2.45 trillion) which is about 18% of all current US treasury bonds. The FED does not purchase them directly from US treasury. It purchases them on the open market from the banks who themselves had purchased them from the US treasury. See US legislation on the matter. The Bank of England has done the same.

[7Natixis, which is, like other banks, favourable to these purchases has published an enthusiastic report on this question in 2005:

[8See Financial Times, “Europe covered bond issues slump”», 27 November 2013.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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