What's needed is "full disclosure", forcing the banks to recognise such losses, taking the hit, and moving on. Some banks would fail, of course, executive egos would be bruised and reputations would suffer. Banks would be restructured, while protecting retail and commercial deposits, with the weak being taken over by the relatively strong. Then, though, banks could recapitalise, the wheels of finance could once again start turning, and capitalism's "creative destruction" would be able to take its course.Over the years, several of our long-time commenters have also warmed to the idea of precipitating a spot of creative destruction to purge the system. In normal times, as a fervent free-market capitalist I'd be among their ranks: but just now I beg to differ.
Back in 2008, one of the remarkable steps taken by authorities worldwide was to require banks to stop marking their positions to market, writing off or provisioning for all bad debt etc etc. - for the probably very well-founded fear that it would start an unstoppable avalanche. I was surprised at the rapidity with which they did this, but in retrospect I don't think it was wrong.
(By the way, some of these new strictures - or perhaps we should say 'reverse strictures' - now apply to corporates, too: it is far less easy for them to make provisions now than previously.)
In other words, we may be sure that astronomic amounts of trouble are stored up behind the newly-erected walls of opacity in the accounts. Release this deluge at your peril. Has to be done eventually, of course, but under careful control.
(By way of an illustration of the prudent management of a far less extreme, but nonetheless dangerous situation: after Enron melted down in 2001, the gas and power sector was plunged into financial darkness. Many highly leveraged power stations became worth very much less than the value at which they appeared on their owners' books. Their banks were therefore in (relatively) serious trouble - these are billion-dollar loans - and the project finance sector froze for almost 2 years.
If any one bank had decided to write down its distressed power-plant loan book, a market valuation signal would have been established, and there would have been carnage. But - even under the stricter rules of the time - by a miracle of, *ahem*, spontaneous identicality of views being taken, this never happened. The entire sector was quietly and very methodically restructured - hence the 'dominos falling slowly' effect I wrote about a long while ago - and three years later you would scarcely have known how close to the brink the system had been.)
Carefully does it, guys - there is a lot at stake here.
PS [for pedants only] - technically speaking it appears Halligan knows not what he is talking about. "UK banks need to maintain capital buffers against unexpected losses. Such "provisioning" is crucial in any economy." Nope: provisions are taken against expected losses - it is risk capital that is held against unexpected losses.