Anorak | Dexia Is Northern Rock

Dexia Is Northern Rock

by | 5th, October 2011

THERE’S a Belgian/French bank out there called Dexia. No, I’d not heard of it until a couple of days ago either. The reason I have heard of it, the reason it’s in the papers, is because it seems to be going bust .

At times during Tuesday’s trading session in Brussels, Dexia shares changed hands for less than €1 and at the close were quoted at €1.008, marking a 22.5pc fall for the day and close to a 60pc drop since the beginning of the year.

The collapse in Dexia’s market value, which currently stands at €1.96bn (£1.68bn), came as François Baroin, France’s finance minister, and Didier Reynders, Belgium’s finance minister, issued a statement saying they would “take all necessary measures for the security of depositors and creditors” and would “guarantee financing raised by Dexia”.

There’s two problems here, the second making the first much worse. The first is that they’ve blown most of the money, the capital of the bank that is, on buying Greek etc government bonds which are now worth 50%, 30%, of what they first paid for them. So the bank is teetering around being bust, having exhausted or nearly so all of its capital reserves.

This isn’t actually a massive problem. So, bank goes bust, shareholders lose their money, new people buy the bank (maybe even the government) and the bank itself is still there. And, crucially, so is all the money of the depositors. As a depositor you don’t have to worry, or at least not very much, if the bank goes bust because the government guarantees your deposit.

Governments do this because without such a guarantee then banks will be subject to bank runs and banks runs are self-fulfilling. People think the bank might go bust, take their money out and the bank does go bust because people have taken their money out. So, the guarantee is in place, we don’t get a bank run but if management has been stupid shareholders still lose their money, but

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Posted: 5th, October 2011 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink