header banner
Default

For practically nothing, UBS acquired Credit Suisse


Table of Contents

    It is sometimes useful to think that the shareholders of a bank are not its owners; they are just renting it from its creditors. Schematically, a bank borrows a bunch of money from depositors and other creditors and uses the money to make loans and buy securities and do other risky investments. If the investments end up being worth more than the deposits, the shareholders keep what’s left. If the investments end up being worth less than the deposits then, uh, that’s bad. Then the shareholders don’t own the bank anymore, for one thing, but that’s really the least of your problems. The real problem is that the depositors can’t lose money; the banking system relies on bank deposits being usable as money. “Banks are speculative investment funds grafted on top of critical infrastructure,” Matt Klein wrote last week. The liabilities (deposits, etc.) are the critical infrastructure; the assets (loans, securities) are the speculative investment fund. The bank is a machine for turning safe deposits into risky investments. If the investments end up being worth less than the deposits, then regulators and central banks step in and there is some sort of rushed rescue to make sure that the depositors still get paid.

    One important consequence of this is that the equity of the bank — the shareholders’ ownership stake — is just a tiny sliver resting on top of an enormous iceberg of liabilities. In a good profitable conservative bank, there might be $100 of assets, $90 of liabilities and thus $10 of equity. The liabilities are certain and knowable, things like deposits that really need to be paid back at 100 cents on the dollar. The assets are risky and variable, and their valuation is a bit of a guess: They include securities with volatile market prices, weird derivatives that are hard to value, and business loans with uncertain probabilities of being paid back. The bank applies some accounting conventions and makes some guesses and comes up with a value of $100 for its assets, but there is a range of uncertainty around that number.

    Sources


    Article information

    Author: Jamie Mendez

    Last Updated: 1702297203

    Views: 823

    Rating: 4.7 / 5 (79 voted)

    Reviews: 88% of readers found this page helpful

    Author information

    Name: Jamie Mendez

    Birthday: 1926-12-02

    Address: 837 Herrera Loaf, Ramseyhaven, MD 95022

    Phone: +3764678417769725

    Job: Landscape Architect

    Hobby: Whiskey Distilling, Writing, Painting, Video Editing, Gardening, Crochet, Playing Chess

    Introduction: My name is Jamie Mendez, I am a frank, irreplaceable, rich, ingenious, risk-taking, multicolored, welcoming person who loves writing and wants to share my knowledge and understanding with you.