Simon Johnson - Bloomberg Interview

Here is an excellent analysis by Simon Johnson from MIT of the banking crisis and the problems of big banks. Published by Bloomberg you will need to follow the link here (I am not able to embed it). The interview is 15 mins - here are a few points from the interview.

• UK banks are currently 5-6 times GDP. Iceland's banks where 11-13 times GDP when their banks collapsed.
• The UK and the swiss are getting worried about having such big highly leveraged financial sectors.
• Big banks tend to peruse the same assets. Previously it was real estate now it is emerging markets. This opens the possibility of them all failing at more-or-less the same time.
• UK Banks need to raise the levels of equity - this will reduce the implicitly subsidy of a highly leveraged operation. When things go well the banks get the benefit of the leverage when it goes badly the government picks up the tab. In the US debt went up 40% after the crisis as a result of bailing out the banks.
• Spanish banks are lucky - they escaped due to their heavy investment in Latin America - which with stability of commodity prices meant that they squeaked buy. They are still, however, under capitalized.
• German Banks are also under capitalized.
• American banks now want to "go crazy" in emerging markets e.g. City Group, JP Morgan. Emerging markets are, however, inherently unstable and will have financial crisis.