Why Big Banks Are Still Among Society's Worst 'Polluters'

Analysis: Because it’s not making news anymore, people think the problem of under-capitalization of big banks in the West has been taken care of. Not so. Indeed, big banks continue to behave like companies who cause environmental damage. We all must cover

The Bank for International Settlement in Basel, Switzerland (Noel Reynolds)
The Bank for International Settlement in Basel, Switzerland (Noel Reynolds)
Mark Dittli

ZURICH - The discussion about a new regulatory framework for big banks has quietly died down. At the Bank for International Settlements (BIS), the Basel Committee on Banking Supervision has approved Basel III. In Switzerland, the somewhat more severe regulations of the "too big to fail" model are being implemented. All is well again. The debt crises in peripheral euro countries like Greece may be grabbing the headlines, but at least big banks aren't giving us any more headaches.

Sounds comforting. Unfortunately, it's also inaccurate.

Just take a closer look at the European Central Bank's Longer Term Refinancing Operation (LTRO), which pumped a good trillion euros into the European banking system. There are no precedents to compare this to, but it is possible that the LTRO made it possible for ECB President Mario Draghi to avoid a last-minute serial bank collapse.

During the autumn months of 2011, the inter-bank market in Europe was completely frozen. The banks didn't trust each other, American money market funds were withdrawing their capital, and a string of institutions was having refinancing difficulties. The LTRO program relieved the banks' acute liquidity needs. So far so good.

But what the program didn't do was solve the underlying problem: bank solvency. European banks are under-capitalized – so then, as now, the systemic risks are huge.

When it comes to systemic risks and bank regulation, Martin Hellwig, director of the Bonn-based Max Planck Institute for Research on Collective Goods, is one of the clearest-thinking and most far-sighted economists in Continental Europe. On Wednesday, at the invitation of Professor Hans Gersbach, he was guest lecturer at the Zurich campus of the Swiss Federal Institute of Techonology, and his subject was "Banking Regulation and Financial Crisis."

"Basel 3 should really have been called Basel 2.01," Hellwig says, adding that Basel III regulations go nowhere near far enough.

And a crucial basic concept remains unchanged: as before, banks are allowed to conduct risk evaluations of their investments based on their own models – even though the 2008 banking crisis clearly showed that these models (not least in the case of UBS) often fail completely. If the will to make the system significantly safer is really there, Hellwig says, then banks must be forced to maintain a capital ratio of 20 to 30% of un-weighted total turnover. Basel III, however, sets the minimum capital ratio at 3%.

Hidden subsidies

A standard argument on the part of the banks is that their own capital is very expensive, and that they would have to cut back massively on loan-giving if they were forced to hold on to more cash. To Hellwig, these arguments are just plain wrong. In two excellent 2010 papers he produced – partly in co-authorship with Anat Admati, Peter DeMarzo and Paul Pfleiderer - he goes through the arguments of the big banks point by point.

One of Hellwig's core arguments is based on the Franco Modigliani/Merton Miller theorem on capital structure. Greatly simplified, this holds that a company's financing costs are unrelated to how much of their capital is their own, versus how much is money that comes from outside. What that means concretely is that a bank‘s own capital is only expensive because they hold on to so little of it, which thus makes risk premiums high. If a bank holds on to more of its own capital, risk premiums are cheaper on all of its capital. As far as total capital costs are concerned, there is no change – ergo, no way the standard bank argument can be used as a reason to extend fewer loans.

The Modigliani/Miller theorem doesn't hold entirely in the case of the banks, however, because the latter's capital costs are distorted due to the implicit – and since 2008 also explicit – government guarantee backing them up, which also means that they can get outside capital cheaply. "What it amounts to is a state subsidy, and it distorts the free market," says Hellwig.

Notably, Hellwig compares the big banks to industries that pollute the environment. In both cases, external costs are generated that have to be borne by society. In the case of industry, for example: polluted rivers. In the case of the big banks: the risk that, in case of emergency, taxpayer money is going to be required to save the day.

That is the real irony – or idiocy? – of the big bank dilemma as it has been discussed for the last three years in the United States, Europe and Switzerland. Supporters of higher capital requirements have routinely been placed – on a politically naïve "Right/Left" scale – on the Left. But since when has it been Leftist to be in favor of eliminating hidden state subsidies and market distortions?

Read the original article in German

Photo - Noel Reynolds

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The True Horrors Behind 7 Haunted Locations Around The World

With Halloween arriving, we have dug up the would-be ghosts of documented evil and bloodshed from the past.

Inside Poveglia Island's abandoned asylum

Laure Gautherin and Carl-Johan Karlsson

When Hallows Eve was first introduced as a Celtic festival some 2,000 years ago, bonfires and costumes were seen as a legitimate way to ward off ghosts and evil spirits. Today of course, with science and logic being real ghostbusters, spine-chilling tales of haunted forests, abandoned asylums and deserted graveyards have rather become a way to add some mystery and suspense to our lives.

And yet there are still spooky places around the world that have something more than legend attached to them. From Spain to Uzbekistan and Australia, these locations prove that haunting lore is sometimes rooted in very real, and often terrible events.

Shahr-e Gholghola, City of Screams - Afghanistan

photo of  ruins of Shahr-e Gholghola,

The ruins of Shahr-e Gholghola, the City of Screams, in Afghanistan

Dai He/Xinhua via ZUMA Wire

According to locals, ghosts from this ancient royal citadel located in the Valley of Bamyan, 150 miles northwest of Kabul, have been screaming for 800 years. You can hear them from miles away, at twilight, when they relive their massacre.

In the spring 1221, the fortress built by Buddhist Ghorids in the 6th century became the theater of the final battle between Jalal ad-Din Mingburnu, last ruler of the Khwarezmian Empire, and the Mongol Horde led by Genghis Khan. It is said that Khan's beloved grandson, Mutakhan, had been killed on his mission to sack Bamyan. To avenge him, the Mongol leader went himself and ordered to kill every living creature in the city, children included.

The ruins today bear the name of Shahr-e Gholghola, meaning City of Screams or City of Sorrows. The archeological site, rich in Afghan history, is open to the public and though its remaining walls stay quiet during the day, locals say that the night brings the echoes of fear and agony. Others claim the place comes back to life eight centuries ago, and one can hear the bustle of the city and people calling each other.

Gettysburg, Civil War battlefield - U.S.

photo of rocks and trees in Gettysburg

View of the battlefields from Little Round Top, Gettysburg, PA, USA


Even ghosts non-believers agree there is something eerie about Gettysbury. The city in the state of Pennsylvania is now one of the most popular destinations in the U.S. for spirits and paranormal activities sight-seeing; and many visitors report they witness exactly what they came for: sounds of drums and gunshots, spooky encounters and camera malfunctions in one specific spot… just to name a few!

The Battle of Gettysburg, for which President Abraham Lincoln wrote his best known public address, is considered a turning point in the Civil War that led to the Union's victory. It lasted three days, from July 1st to July 3rd, 1863, but it accounts for the worst casualties of the entire conflict, with 23,000 on the Union side (3,100 men killed) and 28,000 for the Confederates (including 3,900 deaths). Thousands of soldiers were buried on the battlefield in mass graves - without proper rites, legend says - before being relocated to the National Military Park Cemetery for the Unionists.

Since then, legend has it, their restless souls wander, unaware the war has ended. You can find them everywhere, on the battlefield or in the town's preserved Inns and hotels turned into field hospitals back then.

Belchite, Civil War massacre - Spain

photo of sunset of old Belchite

Old Belchite, Spain

Belchite Town Council

Shy lost souls wandering and briefly appearing in front of visitors, unexplainable forces attracting some to specific places of the town, recorded noises of planes, gunshots and bombs, like forever echoes of a drama which left an open wound in Spanish history…

That wound, still unhealed, is the Spanish Civil War; and at its height in 1937, Belchite village, located in the Zaragoza Province in the northeast of Spain, represented a strategic objective of the Republican forces to take over the nearby capital city of Zaragoza.

Instead of being a simple step in their operation, it became the field of an intense battle opposing the loyalist army and that of General Francisco Franco's. Between August 24 and September 6, more than 5,000 people were killed, including half of Belchite's population. The town was left in rubble. As a way to illustrate the Republicans' violence, Franco decided to leave the old town in ruins and build a new Belchite nearby. All the survivors were relocated there, but they had to wait 15 years for it to be complete.

If nothing particular happens in new Belchite, home to around 1,500 residents, the remains of old Belchite offer their share of chilling ghost stories. Some visitors say they felt a presence, someone watching them, sudden change of temperatures and strange sounds. The ruins of the old village have been used as a film set for Terry Gilliam's The Adventures of Baron Munchausen - with the crew reporting the apparition of two women dressed in period costumes - and Guillermo del Toro's Pan's Labyrinth. And in October 1986, members of the television program "Cuarta Dimensión" (the 4th dimension) spent a night in Belchite and came back with some spooky recordings of war sounds.

Gur Emir, a conquerer’s mausoleum - Uzbekistan

photo of Gur Emir (Tomb of Timur) i

Gur Emir (Tomb of Timur) in Samarkand, Uzbekistan

Chris Bradley/Design Pics via ZUMA Wire

The news echoed through the streets and bazaars of Samarkand: "The Russian expedition will open the tomb of Tamerlane the Great. It will be our curse!" It was June 1941, and a small team of Soviet researchers began excavations in the Gur-Emir mausoleum in southeastern Uzbekistan.

The aim was to prove that the remains in the tomb did in fact belong to Tamerlane — the infamous 14th-century conqueror and first ruler of the Timurid dynasty who some historians say massacred 1% of the world's population in 1360.

Still, on June 20, despite protests from local residents and Muslim clergy, Tamerlame's tomb was cracked open — marked with the inscription: "When I Rise From the Dead, The World Shall Tremble."

Only two days later, Nazi Germany invaded the Soviet Union, with the people of Samarkand linking it to the disturbing of Tamerlane's peace. Amid local protests, the excavation was immediately wrapped up and the remains of the Turkish/Mongol conqueror were sent to Moscow. The turning point in the war came with the victory in the Battle of Stalingrad — only a month after a superstitious Stalin ordered the return of Tamerlane's remains to Samarkand where the former emperor was re-buried with full honors.

Gamla Stan, a royal massacre - Sweden

a photo of The red house of Gamla Stan, Stockholm, Sweden

The red house of Gamla Stan, Stockholm, Sweden


After Danish King Kristian II successfully invaded Sweden and was anointed King in November 1520, the new ruler called Swedish leaders to join for festivities at the royal palace in Stockholm. At dusk, after three days of wine, beer and spectacles, Danish soldiers carrying lanterns and torches entered the great hall and imprisoned the gathered nobles who were considered potential opponents of the Danish king. In the days that followed, 92 people were swiftly sentenced to death, and either hanged or beheaded on Stortorget, the main square in Gamla Stan (Old Town).

Until this day, the Stockholm Bloodbath is considered one of the most brutal events in Scandinavian history, and some people have reported visions of blood flowing across the cobblestoned square in early November. A little over a century later, a red house on the square was rebuilt as a monument for the executed — fitted with 92 white stones for each slain man. Legend has it that should one of the stones be removed, the ghost of the represented will rise from the dead and haunt the streets of Stockholm for all eternity.

Port Arthur, gruesome prison - Australia

a photo of ort Arthur Prison Settlement, Tasmania, Australia

Port Arthur Prison Settlement, Tasmania, Australia

Flickr/Eli Duke

During its 47-year history as a penal settlement, Port Arthur in southern Tasmania earned a reputation as one of the most notorious prisons in the British Empire. The institution — known for a brutal slavery system and punishment of the most hardened criminals sent from the motherland— claimed the lives of more than 1,000 inmates until its closure in 1877.

Since then, documented stories have spanned the paranormal gamut: poltergeist prisoners terrorizing visitors, weeping children roaming the port and tourists running into a weeping 'lady in blue' (apparently the spirit of a woman who died in childbirth). The museum even has an 'incidence form' ready for anyone wanting to report an otherworldly event.

Poveglia Island, plague victims - Italy

a photo of Poveglia Island, Italy

Poveglia Island, Italy

Mirco Toniolo/ROPI via ZUMA Press

Located off the coast of Venice and Lido, Poveglia sadly reunites all the classical elements of a horror movie: plagues, mass burial ground and mental institute (from the 1920's).

During the bubonic plague and other subsequent pandemics, the island served as a quarantine station for the sick and anyone showing any signs of what could be Black Death contamination. Some 160,000 victims are thought to have died there and the seven acres of land became a mass burial ground so full that it is said that human ash makes up more than 50% of Poveglia's soil.

In 1922 a retirement home for the elderly — used as a clandestine mental institution— opened on the island and with it a fair amount of rumors involving torture of patients. The hospital and consequently the whole island was closed in 1968, leaving all the dead trapped off-land.

Poveglia's terrifying past earned it the nickname of 'Island of Ghosts'. Despite being strictly off-limits to visitors, the site has been attracting paranormal activity hunters looking for the apparition of lost and angry souls. The island would be so evil that some locals say that when an evil person dies, he wakes up in Poveglia, another kind of hell.

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