As US bank regulators closed two small banks on Friday, the first American banks to fail in 2009 after 25 were shut last year, Britain moved towards its second huge bank bailout package and Denmark revealed a new $A22 billion rescue plan for its banking sector. It has been a busy week in global banking as more firefighting and rescues eradicate the end of 2008 feeling that perhaps the worst might be over.

Denmark’s move came late Sunday with news that it will expand its existing package by lending the country’s banks and mortgage lenders 100 billion kroner ($US17.8 billion) as economy slides deeper into recession. Denmark will lend as much as 75 billion kroner to banks and the rest to mortgage institutions: the previous package had provided government backing for deposits and interbank loans.

The Government said it would establish a 20 billion-krone fund that will provide loans to the country’s exporters to try and maintain output.

It was the latest in a series of moves by governments and regulators to again try and stabilise tottering economies and banking systems.

In the US, the moves to close the National Bank of Commerce and the Bank of Clark County, came hours after terrible losses were reported by the stumbling mega banks, Citigroup and Bank of America, with the latter getting another round of government aid to match the level of aid given late last year to Citi.

The two failed banks were tiddlers by comparison to the giants: both had assets and liabilities each of less than half a billion US dollars. But their closures underlined the still pertinent fact, glossed over by investors in the end of year break, that banks are still weak.

The crisis gripping major banks in the US and other major northern economies shows no sign of easing three weeks into the New Year and it wouldn’t surprise to see the new Obama Administration reveal plans to help the struggling sector later this week along with the much discussed $US825 billion economic stimulus package. Certainly the pressure is growing on him to make such a move a major first or second step this week.

While Australian banks still seem to be in solid health, banks in the US, Ireland, Germany and the UK are not getting any better.

In fact they are stumbling towards another crisis and moves by the US, and now the UK Government to try and arrange a new scheme or schemes to remove the bad loans from balance sheets, seems to be the last hope.

Barclays, the big UK bank, lost 25% of its market value last week on worries about earnings and its strength, while figures published in Germany claimed the country’s major lenders had over half a trillion US dollars of festering lending assets that were not returning anything to the holders.

Meanwhile, the Irish Government took over the country’s third biggest bank, Anglo Irish Bank, after a run forced it to abandon a 1.5 billion euro recapitalisation plan. The bank had been hit by a crisis of confidence over secret insider loans to the former chairman and other board members. The scandal forced mass retirements from the bank and caused Ireland’s senior financial regulator to leave his job early.

The crisis at Anglo meant the government would have been on the hook for upwards of 100 billion euros under its controversial guarantee of all bank liabilities; a move that sparked the unseemly global rush to introduce government guarantees in October-November of 2008 as governments sought to steady their shaking financial systems.

It’s quite clear now that the Irish Government has completely stuffed up its support of its banking sector — not helping was the secret loans to Anglo’s chairman (and former CEO) totalling more than 80 million euros over the past eight years. Those loans were removed from the bank’s loan book and balance sheet each reporting period and hidden in another bank or banks.

A further 90 million euros of loans to current and former bank board members have been identified, according to UK reports.

Now there are reports that the Irish financial regulator is only now examining all loans to all directors in each of the six banks covered by the Government’s guarantee more than a month after the dodgy loans to the Anglo Irish chairman became public.

In Britain there’s a proposal for the UK government to ‘insure’ the bad loan assets of the country’s banks instead of buying them.

Under the plan, the UK government will create a new insurance scheme that would see that liabilities of up to $A500 billion will be ‘insured’ via a scheme that would have the government picking up any shortfall beyond an as yet undisclosed level.

London media reports said this scheme won favour at the expense of alternative plans to create a “bad” bank under which the government would have simply bought banks’ existing toxic debts, as the Americans seem to be heading towards.

But the key problem remains the illness in the US banking sector that is in turn preventing banks from lending and re-starting the credit system. Last week confirmed that the source of the problem, the depressed US housing sector, was not recovering with an 81% rise in foreclosures in 2008.

In an attempt to restore the confidence of the troubled US financial sector, the new Obama administration and the US Federal Reserve are reportedly discussing moves said to include a government bank that would buy up toxic assets from the banks; these would include failed mortgages, poor corporate and other property loans, dud credit card, student and car loans as well.

The purchases would be funded by taxpayers, the “bad bank” would buy the assets clogging bank balance sheets and transfer the risk of holding them on to the government. The funds could come from the second $US350 billion tranche of the bailout package approved last October. The US Senate passed its release Friday.

US media reports say the Obama Administration will use some of the $US350 billion to help homeowners avoid foreclosure. It may also assist cash-strapped cities and states that are having trouble selling bonds in the US now because of a lack of buyers. The Fed has also indicated that it will support these sectors if need be.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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