From Banking Day:
Speaking in Hong Kong, Byres considered a principal legacy of the recent crisis.
“The expectation of a government backstop has been one area where, unfortunately but necessarily, expectation has been matched by reality,” he said.
“Some governments were even forced to bail out the holders of capital instruments. And by allowing over-leveraged banks to strengthen their balance sheets by shedding assets and constraining lending, rather than being more forcefully recapitalised, we have seen shareholders effectively bailed out, too.
“If this remains the prevailing expectation, then we have an even bigger problem than we thought: not only will markets fail to adequately act as a disciplining device, but they will continue to encourage and reward excessive risk-taking.
“The costly misallocation of credit will again be the result,” Byres said.
Mr Byers should know. He’s just watched on (and dis nothing) while exactly that process played out in Australia’s huge investor mortgage bubble blow off.
But what investors in banks lack in terms of discipline they always make up for in emotion sooner or later. What was given will be taken away in a hurry at some point. Yesterday Australian bank CDS prices (a proxy for bond yields) rebounded to 80bps, breaking out of a recent thaw that got them as low as 76bps:
The trend is firmly up and will remain so as the mining GFC deepens.
