Banks, bailouts and texting and driving: James Saft

The idea that a brush with death will change a lucky escapee's priorities apparently does not apply to bailed out banks.

While you might be pulled from the smoking wreckage of your car and decide to stop texting while driving, the banks which got government injections of capital during the financial crisis concluded, it would seem, that the problem was that they were not pressing the buttons fast enough.

A new study by the Bank for International Settlements, the so-called central banks' central bank, shows that not only did the bailed out banks not cut back on risk in their lending into the syndicated loan market after being defibrillated by their governments, they actually increased it relative to the market and banks which did not get rescued. This is both astounding and totally predictable. Astounding because it was so clear that those risks were not just foolish but destructive. Predictable because of course the banks realized that they had not been just lucky but had been given a special exemption from death which will be very hard to revoke.

The study looked at the behavior in the syndicated loan market of a group of 87 banks from industrial economies, accounting for about half of global banking assets, 40 of which took public capital. The syndicated loan market, in which banks originate and distribute loans, is a key source of company funding and is used to fund mergers, recapitalizations, investment or simply ongoing corporate need.

Predictably, the banks which got bailed out were those taking the biggest risks in the syndicated loan market before the crisis, according to the study, making more leveraged loans with high interest rates, and making loans with longer maturities. Their loan books also got hit with more credit downgrades after the crisis broke.

They were also, according to the study, not being paid enough compensation for the risk before the crisis, not just in absolute terms, which given the debacle is obvious, but even relative to the go-go market in which they were operating.

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