The way to prevent yet another US bank crisis – Asia Times

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This is the third part of a three-part series. 

Financial system default crises can be rendered less frequent, and future bailouts of the financial system can be obviated, by private conversion of limited-liability corporate-form banks into non-corporate-form proportional-liability financial firms. 

Such firms would be less prone to default than banks are, and would not need government insurance to protect their depositors – even if they keep the same employees, payrolls, physical plant and equipment, deposits, depositors, and outstanding loan portfolios as the banks from which they are converted.

Private conversion of banks to proportional-liability financial firms is impeded not only by its conceptual novelty – no one seems to have done it or publicly suggested it until now – but also by governmental obstacles that reduce its profitability or administrative feasibility. 

Government insurance of bank deposits effectively eliminates the greatest profit incentive to convert a bank to a proportional-liability financial firm, namely that this conversion would lessen the default risk borne by its creditors including its uninsured depositors and hence the compensation that they demand. 

In addition, central, state and local governments, having no experience of non-corporate proportional liability firms, make no provision for them in diverse kinds of business regulation and taxation. One example is the issuance of business charters, the standard term for which, “articles of incorporation,” reflects the ubiquity of the corporate form.      

Partly due to the intrinsic advantages of converting banks into proportional-liability financial firms and partly due to political considerations described near the end of the second part of this three-part essay, the House Republican Caucus might best respond to any Biden administration request for a banking-system bailout during this session of Congress by conditioning its support for the requested bailout on prior enactment of legislation mandating imminent termination of governmental impediments to private conversions of banks into proportional-liability financial firms. Such legislation might aptly:

(1) mandate termination of FDIC bank deposit insurance within two years;

(2) repeal Title II of the Dodd-Frank Act, effective within two years;  

(3) and prohibit (under the interstate commerce clause of the US Constitution) any federal, state or local government discrimination against proportional-liability financial firms relative to banks in any aspect of taxation or business regulation, including the issuance of business charters, effective within six months. 

Higher Federal taxes, after two years, on banks not converted to proportional-liability financial firms, might also be warranted for banks that are not functionally specialized and structurally atypical but ought not to be necessary to induce private conversion of nearly all banks into proportional-liability financial firms. 

The rest of this essay, except for a brief envoi, tells how and why proportional-liability financial firms would be better than banks both singly and collectively, i.e., why private conversions of banks into proportional-liability financial firms would be profitable, absent governmental impediments, and why governments should facilitate and encourage such conversions.   

Problems of the corporate business form

The distinguishing feature of the corporate business form is limited liability – the exemption of the owners of a firm’s equity from any personal liability for the firm’s liabilities. 

Limited liability causes the interests of a corporation’s equity owners to be increasingly at odds with the interests of its creditors as the value of a solvent corporation’s assets diminishes relative to the value of its liabilities. 

As a solvent corporation (one with assets worth more than its liabilities) approaches insolvency (the point at which its assets are worth no more than its liabilities), its equity owners increasingly want it to take risks, even risks with negative expected values. 

For the equity owners of a nearly insolvent corporation, whose equity is already worth next to nothing and cannot have a negative value due to limited liability, there is negligible scope for loss but great scope for gain by taking large risks, even if they are bad bets.

All the downside risk of a nearly insolvent corporation is born by its creditors, who increasingly prefer that a solvent corporation not take risks as it approaches insolvency. However, a corporation’s creditors,i.e., the owners of its liabilities, have no voting rights in the corporation’s control. 

All voting rights in a corporation’s control typically are allocated to the owners of its equity, each share of equity being assigned one vote. Consequently, corporations, insofar as their management is informed by the interests of the holders of rights to vote in choosing their directors, tend to become more risk-loving and less profit-maximizing as they approach insolvency.

If a corporation’s equity trades in liquid markets, then individual owners of relatively small amounts of either its equity or its debt may be able to rely on exit (selling out) rather than voice (voting rights in corporate control) to protect their interests so management tends to be relatively independent of equity owners, save for those who own more equity than can be sold without lowering the market price of the corporation’s equity. 

However, if there is no liquid market for a corporation’s equity or if the price at which a corporation’s equity trades is highly volatile, as it may be if the corporation is either highly leveraged financially or engages in business that is unusually risky, then exit substitutes less well for voice, and even owners of relatively small amounts of equity may be concerned to make the corporation’s management reflect the interests of its equity-owners.  

If a corporation’s debt trades in liquid markets at prices that are not highly volatile, then individual owners of small amounts of its debt may be able to rely on exit (selling out) to protect their interests. Otherwise, a corporation’s financial creditors may try to protect their interests by “protective covenants” that constrain management but entail non-negligible monitoring and enforcement costs.   

How the corporate form’s problems afflict banks

With no exceptions known to this writer, US banks are corporations.  Their equity owners are totally exempt from personal liability for banks’ financial liabilities and typically are the only holders of voting rights in banks’ control. 

Financial firms that are not corporations are not called banks. For example, credit unions resemble banks in their main activities – taking deposits and making loans – but differ from banks in not being corporations. A credit union is depositor-owned.  It has no equity distinct from its deposits. Voting rights in its control are typically held solely by depositors in proportion to the value of their deposits.

The structural and behavioral characteristics of corporations described in this essay’s previous section also apply to banks, with variations described in the rest of this section.

A bank’s assets are chiefly the outstanding loans that it has made or loans made by other banks that it has bought, often in risk-diversifying bundles like mortgage-backed securities. The liabilities of a bank are chiefly its deposits, although many banks also issue debt securities.

The creditors of a bank are chiefly its depositors. The relatively few functionally specialized and structurally atypical banks for which not all of this is true fall outside the scope of this part of this essay.

If some of a bank’s deposits are government-insured, then their owners, unlike the bank’s other creditors, do not increasingly prefer that a solvent bank not take large risks as it approaches insolvency. Bank deposits are not readily tradable, but they can be withdrawn, often on demand or on short notice. Owners of uninsured bank deposits typically rely chiefly on exit by withdrawal to protect their interests.

Exit tends to substitute for voice less well for owners of a bank’s equity than for owners of the equity of non-financial corporations, even if there is a liquid market for the bank’s equity because the price of a bank’s equity tends to be more volatile than the price of the equity of a non-financial corporation. 

Bank equity prices tend to be more volatile than the equity prices of non-financial corporations for two reasons. First, banks typically are more leveraged – i.e., they have more liabilities relative to equity – than non-financial corporations. 

Their assets are created chiefly by lending money supplied by their depositors; their equity serves chiefly as a buffer against losses and tends to be little larger than is required by government regulators. Second, many factors affecting the value of banks’ assets, like market interest rates, are social constructs that can change rapidly.

For both these reasons, banking is an extraordinarily risky business. The impressively stable architecture long favored by banks, featuring multiple thick columns that appear able to withstand earthquakes, was deliberately crafted to belie this reality and inspire greater trust in banks than they in fact warrant.

Because exit tends to substitute for voice less well for owners of a bank’s equity than for owners of the equity of non-financial corporations, the management of a bank tends to be more responsive to the interests of its equity owners than is the management of a non-financial corporation.

Consequently, limited liability’s tendency to make corporations risk-loving and not profit-maximizing, insofar as corporate management is informed by the interests of its equity owners, to an extent that increases as a solvent corporation approaches insolvency, tends to afflict banks more strongly than non-financial corporations.

The tendency of limited liability to make solvent banks behave in increasingly default-prone ways as they approach insolvency, to an even greater extent than do non-financial corporations, is at best constrained, not eliminated, by greater government risk-control regulation of banks than of non-financial corporations.

In addition, the susceptibility of banks to default has greater negative externalities for the economy generally than does comparable susceptibility to default in non-financial corporations. Bank failures contract the money supply more than do failures of non-financial corporations, and therefore are uniquely likely to precipitate general economic contraction, as in 2007-08, or to aggravate an already severe economic contraction, as in 1932-33. 

That is why the US government, through the FDIC, has since 1933 been the insurer of first resort for many bank deposits but has never been the insurer of first resort for any comparably large set of liabilities of non-financial corporations.

How to solve the problem: Convert banks to proportional-liability financial firms

A bank’s propensity to take unwarranted risks, which increases as a solvent bank approaches insolvency and thereby makes the bank prone to default, could be eliminated by restructuring the bank as a financial firm with a business form that is neither a joint stock company nor a corporation but is rather between the two.

In a joint stock company, anyone owning any of its equity is personally liable for all of its debt.  Until well into the 19th century, this aspect of the then-dominant business form helped keep debtors’ prisons full. It also gave us “Ivanhoe”, which Sir Walter Scott wrote in two weeks in order to earn funds he needed to stay out of debtors’ prison after a joint stock company, some equity of which he owned, went bankrupt. 

Beyond the problems entailed by impoverishing equity owners, joint stock companies suffered from the problem that the value of their debt depended in part on the value of the ever-changing personal wealth of each of an ever-changing set of equity owners, and hence was very hard to appraise.

In a corporation, by contrast, equity ownership entails no personal liability for any of the firm’s debt. Its default risk is born entirely by its creditors, who in the case of a bank are chiefly its depositors.

In Western countries, including the US and Britain, the corporate form was legalized and then quickly superseded the joint-stock company form during the 19th century.  However, in that transition, an intermediate business form that rather obviously suggests itself was seldom if ever tried.

In that intermediate form, arguably best called the “proportional-liability” form, anyone who owns a specific proportion of its equity would be personally liable for the same proportion of its liabilities, or at least of its financial liabilities including debt securities that it has issued and, in the case of financial firms, deposits that it has accepted. 

(For the purpose of rendering, equity owners less risk-loving, they need not be personally liable for the firm’s unforeseeable liabilities). 

This proportional liability form would expose equity owners to slightly more personal liability than does the corporate form, but to far less personal liability than did the joint-stock company form. It could not impoverish any equity owner who did not foolishly overconcentrate his wealth in the equity of a single firm.

Moreover, a proportional-liability firm could include, in its charter or by-laws, limits on the amount of the firm’s equity that any individual could own, crafted to prevent overconcentration of personal wealth in its equity and in other assets with prices that co-vary strongly with the price of its equity. 

Governmental regulators of financial firms might help in the enforcement of those rules, or promulgate and enforce such rules themselves. Securities brokerages have routinely enforced such rules on their clients for many decades. 

Absent overconcentration of personal wealth in the firm’s equity and strongly price-covariant assets, the value of the firm’s debt would not vary significantly with changes either in its equity ownership or in the personal wealth of individual equity owners. 

Such a proportional-liability firm’s default risk would be born wholly by its equity owners, although no equity owner would bear too much of it. Consequently, the owners of a proportional liability firm’s equity, unlike the owners of a corporation’s equity, would neither want the firm to take risks with negative expected values nor increasingly want it to do so as it approaches insolvency.

Although the proportionate-liability business form might have advantages over the corporate form for a broad range of firms, those advantages, both for the firm and for society generally, seem greatest for financial firms – the firms that we call “banks” when they are structured as corporations – because the high business risk and high leverage of banks tends to make exit substitute for voice less well for their voting-right-monopolizing equity owners than for the voting-right-monopolizing equity owners of non-financial corporations, which tends to make the management of banks more responsive to the flawed incentives of their equity owners than are the managements of non-financial corporations.

Allocating voting rights in proportional-liability financial firms to obviate deposit insurance

A proportional-liability firm could, by provisions of its charter or by-laws, divide voting rights in its control between the owners of its equity and the owners of its financial liabilities (its creditors or debtholders) in a ratio determined by the relative values of the firm’s assets and its liabilities. 

So long as the market value of the firm’s assets exceeds the face value of its liabilities, equity owners would hold most of the voting rights in the firm’s control.  If the market value of the firm’s assets fell below the face value of its liabilities, most of the voting rights in its control would become held by it is creditors – chiefly by its depositors in the case of a financial firm. 

The assets of a proportionate-liability firm, like the assets of a corporation, would not be traded, hence would not have a directly observable market value. However, the value of the tradable equity of a proportional-liability firm would be the market value of its assets minus the present face value of its liabilities, per the basic accounting equation, E = A – L. 

That equation is true for a proportional-liability firm and implies that A = E + L. E and L are directly observable, E being the price of traded equity and L being the sum of contractually specified future payments, each discounted at the risk-free interest rate for the term of its maturity. 

Consequently, A, the market value of the firm’s assets, is readily ascertainable.  This enables voting rights to be divided between the owners of the firm’s equity and the owners of its financial liabilities in proportion to the current relative values of A and L.

Among the advantages of allocating any proportional-liability firm’s voting rights in this way is that it obviates recourse to slow and costly bankruptcy courts as a means of transferring control of a firm from its equity owners to its creditors when the firm becomes insolvent – while also allowing the equity owners hope of regaining control of the firm if the owners of its financial liabilities choose not to liquidate it and it returns to solvency while under their control.

Among the advantages of allocating a proportional-liability financial firm’s voting rights in this way is that it obviates government insurance of depositors. As soon as the value of a proportional-liability financial firm’s assets (chiefly loans) becomes insufficient to cover the face value of its liabilities (chiefly deposits), majority control of the firm passes from its equity holders to its creditors (chiefly its depositors). 

Consequently, either federal or state law or regulation might usefully require any proportional-liability financial firm to allocate its voting rights in this way, even though such voting right allocation has firm-specific efficiencies that could impel any proportional-liability firm to implement it spontaneously.

The problem with banks that has large negative external consequences and requires government insurance of bank deposits is that the incentives of the equity owners who exclusively own voting rights in a bank’s control conflict systematically with the incentives of depositors, and conflict with them more strongly as the bank’s risk of default (insolvency) grows.

That problem seems easily solved by replacing banks with proportional-liability financial firms. So kiss goodbye to the FDIC and to comparably unneeded deposit-insurance bureaucracies in other countries.    

The benefits of proportional liability cannot be captured by a corporation 

The market value of a corporation’s assets cannot readily be inferred from the price of its traded equity and the present face value of its liabilities, as the value of a proportional liability firm’s assets can.  Consequently, a corporation cannot divide its voting rights between its equity owners and its creditors in proportion to the ratio of the market value of its assets to the present face value of its liabilities.

The same inability, readily to infer the market value of a corporation’s assets, precludes creating an efficient market for corporate default risk insurance that might obviate government insurance of bank deposits.

The basic accounting equation, E = A – L, is not true for a corporation.  For a corporation, E = A – L + P,  E being the market value of its equity, A being the putative value of its assets, L being the present face value of its liabilities, and P being the putative value of limited liability, which can in theory be priced as a put option (hence “P”) owned by equity owners that enables them to sell (A – L) to the firms’ creditors for nothing when A – L is worth less than nothing. 

Because P, the value of that put, can never be less than A – L, E can never be worth less than zero. That is, due to limited liability, corporate equity – unlike the equity of a proportional-liability firm – can never have a negative market value.

Of the four variables in the corporate-form equation, E = A – L + P, only E and L are observable, E being tradable and L being contractually specified.  Consequently, although the value of E + L can be observed and must equal the sum of A + P, neither the value of A nor the value of P can readily be ascertained. 

There is no close-form solution to the problem of pricing either A or P by what is generally deemed the only rigorous and reliable method of pricing market-traded financial securities, namely the Black-Scholes-Merton option-pricing model developed in the 1970s or some variant of it. 

The best way to try to estimate the value of either A or P that is consistent with Black-Scholes-Merton pricing apparently involves simultaneous iterative estimation of both A and P based on past and current prices of both.  However, even this may fail to yield unique values for A and P.

Presumably for this reason, the prevailing method of pricing credit default swaps (CDS) does not apply the Black-Scholes-Merton option pricing model and is crude by comparison. Googling for “CDS mispricing” yields no smaller number of recent academic articles in the titles or bodies of which that term appears. 

The impossibility of pricing corporate default risk rigorously may largely explain why there is still no liquid public market for credit default swaps, so that no reporting on the CDS markets is required or published by any regulatory entity.

It seems impossible to make a well-priced insurance market for corporate default risk, i.e., a market in which corporate equity owners could sell P and corporate creditors could buy P, which would enable them to synthesize the proportional-liability form and capture some of its advantages while the firm remains legally a corporation. 

It seems impossible either to allocate corporate default risk efficiently or to allocate voting rights in corporate control optimally. The corporate business form apparently precludes both. To capture these benefits of the proportional-liability form, a corporation must be formally converted into a proportional-liability firm.

Envoi: the prospective loss of our heritage of bank-hatred

Proportional-liability financial firms would be no less able and willing than banks have been to foreclose on grandma’s farm, to evict widows and orphans from their homes, and to deny working people loans to pay for medical operations needed to save the lives of their children. 

However, they, unlike banks, would neither often cause uninsured depositors to lose their life savings, nor, by defaulting en masse, recurrently precipitate economic contractions that deprive millions of their livelihoods. Proportional-liability financial firms might be merely loathed and despised rather than viscerally hated, as banks have been by most people ever since usury became tolerated and institutionalized.

Saddeningly, we will suffer a vast and irretrievable cultural loss if our financial institutions cease to inspire hatred in enduring them, wit in mocking them and bravery in fighting them. 

Without banks, how will our grandchildren be able to appreciate Dickens’ “Little Dorrit” or Wolfe’s “Bonfire of the Vanities?” How will they be able to savor Barry’s doubling in Peter Pan of Captain Hook, a child-murdering pirate, and George Darling, a childhood-killing banker? 

How will they grasp the symbol-inversion in Mary Poppins’ use of a black umbrella, a badge of office borne by Victorian London bankers even under clear skies, to fly children away from the clutches of their joyless banker-father? 

Without banks, how will our posterity be able to empathize with the Americans of the Great Depression, whose most-admired heroes, during and after the nationwide bank failures of 1932-33, were bank robbers like John Dillinger, Pretty Boy Floyd, Bonnie Parker and Clyde Barrow?

Without banks, how will future generations feel why the Paris Commune and the Bolshevik Revolution were so appealing to so many? How will they feel what has been conveyed by Jew-hatred’s portrayal of Jews as bankers or would-be bankers, which, after the German bank failures of 1931, contributed mightily to the rise of Hitler and the Holocaust?

If banks and their chronic default crises end, even without ending loan denials, foreclosures and evictions, then much of our past will be gone with the wind, as much of America’s past was when slavery ended, even though few freed slaves got their promised forty acres and a mule. 

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Maldives: Indian troops to exit country as China gains foothold

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Maldives' President Mohamed Muizzu speaks during the World Government Summit in Dubai on 13 February 2024Getty Images
By Anbarasan Ethirajan
BBC News

India is set to pull its first batch of military personnel from the Maldives on Sunday as the island nation moves closer to China.

The phased withdrawal of about 80 Indian troops must meet a May deadline set by President Mohamed Muizzu, who is widely seen to be pro-China.

India has said its military personnel were stationed in the Maldives to maintain and operate two rescue and reconnaissance helicopters and a small aircraft it had donated years ago. Removing Indian troops was an election promise made by Mr Muizzu, who came to power in November.

India has long wielded influence over the Maldives, whose strategic location in its backyard allowed it to monitor a crucial part of the Indian Ocean. But the relationship between the countries has soured over the past few months, partly due to Mr Muizzu’s strong rhetoric against Delhi. It’s a gap China is looking to exploit as the Asian powers jostle for influence in the region.

Even then, Delhi and Male (the capital of the Maldives) managed to agree that Indian civilian technical staff would replace military troops to operate the aircraft – the first team has already reached the islands.

“The aircraft will remain in the Maldives, and Indian [civilian] personnel will continue to be there to maintain them. So both sides seem to have reached a compromise,” says Shyam Saran, a former Indian foreign secretary.

Some in the Maldives see the replacement of troops by civilians as a climbdown by Mr Muizzu after his high-voltage ‘India Out’ campaign.

Mr Muizzu’s office did not respond to requests for comment.

Chinese President Xi Jinping and Maldivian President Mohamed Muizzu attend a welcome ceremony at the Great Hall of the People in Beijing, China 10 January 2024.

Reuters

Some analysts warn that the Maldives, a nation of just over half a million people, faces the risk of being caught up in the Asian power rivalry.

China has loaned more than a billion dollars to the Maldives over the years, mostly for infrastructure and economic development.

Both Beijing and Male elevated their ties to a comprehensive strategic partnership in January when Mr Muizzu went to China on a state visit – he is yet to visit India, unlike previous Maldivian leaders.

Earlier this week, the Maldivian government signed a “military assistance” agreement with China that has caused some concern in Delhi.

The Maldivian defence ministry said the agreement was “gratis” (without payment) without providing more details. But addressing a public meeting on Tuesday, Mr Muizzu said China would offer non-lethal weapons for free as well as train the Maldivian security forces (both India and the US have trained the Maldivian military so far).

“This is unprecedented. It’s the first time the Maldives has signed a defence agreement with Beijing to provide military assistance,” Azim Zahir, a Maldivian political analyst, told the BBC.

“We knew that Mr Muizzu would forge closer ties with China in terms of investment and capital, but no one expected him to go to this extent,” he said.

But Beijing denies having any long-term military plans in the Maldives.

“It’s a normal relationship between two countries. If China wants to have a military presence in the Indian Ocean, maybe it has better choices than the Maldives,” says Dr Long Xingchun, president of the Chengdu Institute of World Affairs think-tank.

People conduct business and stand outside of the bank of Maldives during the daily life in Male, Maldives on December 05, 2023.

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Despite Beijing’s assurances, many believe that China is moving swiftly to take advantage as the previous government, led by President Ibrahim Mohamed Solih, had an “India-first” approach.

During his election campaign, Mr Muizzu had accused the previous administration of not disclosing the fine print of Male’s agreements with Delhi. He now faces similar criticism.

“We don’t have any details of most of the agreements he signed during his visit to Beijing. Mr Muizzu is no better than the previous government when it comes to disclosing details of such accords,” says Mr Zahir.

Last month, Mr Muizzu’s administration allowed a Chinese research ship, Xiang Yang Hong 3, to dock at Male despite opposition from Delhi. Male argued that it was a port call “for rotation of personnel and replenishment”.

But that did not convince some Indian experts who feared it may be a mission to collect data which could be used by the Chinese military later in submarine operations.

Amid the ongoing irritants in relations, Delhi has commissioned a new naval base in the Indian archipelago Lakshadweep, close to the Maldives.

India's naval base at the Minicoy Island close to the Maldives

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The Indian navy said the INS Jatayu in the Minicoy island would enhance its efforts in “anti-piracy and anti-narcotics operations in the Western Arabian Sea”.

While some have read it as a message to Male, Indian experts say the move is not a response to the current tensions.

“I don’t think that is something new. As far as I am aware, this has been in the works for some time,” said Mr Saran, the former Indian diplomat.

Mr Muizzu’s anti-India moves have also worried many in his country. The Maldives depends on India for imports of essential food items, medicines and construction material. Post the Covid pandemic, India was also sending the highest number of tourists to the Maldives.

But this has changed after a recent controversy which led to a social media call for Indians to “boycott” the Maldives after some officials made controversial comments about Prime Minister Narendra Modi.

The controversy broke while Mr Muizzu was in Beijing, and he asked Chinese authorities to start sending more tourists to regain the top spot the country held before the pandemic.

Since then, Chinese tourists have started visiting in sizeable numbers. According to tourism ministry data, of the nearly 400,000 tourists who visited the Maldives in the first two months of the year, 13% were from China. India has slipped to the fifth position.

Some also expect Mr Muizzu’s rhetoric to intensify as the parliamentary elections on 21 April draw closer and he aims for a majority in the house.

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IWD Deal Analysis: How IIX’s WLB6 Orange bond helps women’s livelihoods in Asia | FinanceAsia

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In a growing regional trend, December 2023 saw the sixth issuance of Impact Investment Exchange (IIX)’s Women’s Livelihood Bond (WLB) Series, the $100 million Women’s Livelihood Bond 6 (WLB6).

Altogether the IIX, since 2017, has raised $228 million to support women’s economic empowerment in Asia, with the overall trend in deal size on an upward trend. FinanceAsia discussed the investors, the rationale and the processes involved in order to celebrate International Women’s Day (IWD) 2024 on Friday, March 9 and the drive towards diversity, equity and inclusion (DEI) across the region. 

The closing of WLB6 marked the world’s largest sustainable debt security and was issued in compliance with the Orange Bond Principles and aims to uplift over 880,000 women and girls in the Global South.

Global law firm Clifford Chance advised Australia and New Zealand Banking Group (ANZ) and Standard Chartered Bank pro bono as placement agents.

Proceeds from WLB6 will be used to promote the growth of women-focused businesses and sustainable livelihoods across six sectors: agriculture; water and sanitation; clean energy; affordable housing; SME lending and microfinance across India, Cambodia, Indonesia, Kenya and Vietnam. 100% of the $100 million proceeds designed to advance UN’s Sustainable Development Goals (SDG) 5: gender equality and 25-30% designed to advance SDG 13 — climate action.

Robert Kraybill, chief investment officer, IIX, told FA: “The Women’s Livelihood Bond (WLB) Series is a blended finance instrument that pools capital from public-sector development finance institutions and private-sector investors. The public sector investors provide risk-tolerant “first-loss” capital in the form of subordinated notes, while the private sector investors purchase the senior bonds.”

“The WLB Series targets a range of private sector investors seeking a combination of high impact with low risk and an appropriate return. From the outset, beginning with the WLB1, the bonds have attracted both family offices and institutional investors. Initially, this was skewed towards family offices. As the WLB issuances increased, we saw increased interest from institutional investors, such that over 90% of the WLB6 was placed with institutions,” added Kraybill. 

For WLB6, there were global investors on the deal including from the US, Europe and Asia Pacific (Apac). The WLB6 bonds comply with the EU and UK securitisation regulations, making it easier for European institutional investors to participate. For example, one of the investors was Dutch pension fund APG Asset Management which invested $30 million.

Kraybill said: “Throughout building the loan portfolios for the WLBs – from sourcing and screening to due diligence – we integrate traditional credit criteria with impact criteria. We look to invest in companies meeting our credit and financial criteria while delivering meaningful positive impact.”

“We are proud that we have not experienced any payment defaults or credit losses on any of the WLB loan portfolios, demonstrating the resilience of the high-impact women-focused businesses that we work with, even in the face of challenges posed by the Covid-19 pandemic. The first two bonds in the WLB Series – WLB1 and WLB2 – have matured and been fully retired, meeting all of their obligations to bondholders,” Kraybill added. 

The IIX, which is headquartered in Singapore and has offices in Australia, Bangladesh, Brunei, India, Indonesia, the Philippines, Sri Lanka and Vietnam, also tracks the impact outcomes generated by its investment throughout the life of the bonds and reports on the targets. WLB1 and WLB2 exceeded impact projections, according to IIX.   

Complex deal

Given the number of parties involved and a myriad of regulations and compliance, the deal was not easy to put together. 

Gareth Deiner, partner at Clifford Chance, explained to FA the law firm’s role in the deal: “We’ve been involved for several years on these transactions, and this is not the first woman’s livelihood bond that the IIX team has put together.”

Singapore-based Deiner continued: “Historically, we have acted on the trustee side, but we have been advising the lead managers of the transaction for the last three offerings. It’s approximately a three to four month execution process to make sure we get the documentation agreed and the structure in place. IIX do the underlying due diligence on the borrowers, which is necessary given that the financing is raised from the international capital markets. Together with their counsel, they work on the disclosure in the offering document for the bond transaction.”

“As counsel to the lead managers, we are responsible for the underlying contractual documentation for the notes and the offering, but it’s IIX who retain control over the loan documentation with the notes proceeds end-users, and putting the loan pool together. They’re doing due diligence on the on the underlying borrowers of the deal,” he explained. 

This is backed up by IIX’s due diligence. IIX’s Kraybill explained: “The financial due diligence conducted by our credit team is similar to that of other emerging market lenders. What sets us apart is the upfront impact due diligence and ongoing impact monitoring and reporting conducted by our impact assessment team. Our team screens potential investments against rigorous eligibility criteria to ensure they contribute to positive outcomes for underserved women and gender minorities in the Global South while often empowering women as agents of climate action.”

Navigating US legal rules and dealing with investors from around the world also added to the complexity. 

Deiner said: “Dealing with a wide range of investors, including qualified institutional buyers in the US, we needed to comply with US federal securities law, including limiting the sale of the notes to qualified purchasers under the US Investment Company Act. There were also certain structural considerations raised by the EU and UK securitisation regulation.”

“From a legal perspective, it was an interesting deal because there’s a wide range of highly technical substantive law, which required the input from specialists across the Clifford Chance network. We have the expertise across the globe and do a lot of sustainable financing work,” continued Deiner. 

“Recently we’ve advised on some market-leading and groundbreaking transactions in terms of bringing sustainability finance technology to capital markets transactions,” he added.

However, this deal, in particular, involved social governance goals. 

Deiner explained: “What we like about this particular transaction is that so much of the Environmental Social and Governance (ESG) agenda is about the environmental (E) angle, such as green bonds related to carbon transition and climate action. That encompasses sustainable  development goal 13 of the UN Sustainable Development Goals (SDG).”

“However, you rarely hear about sustainable finance transactions that focus on the S and the G in ESG, which IIX champions. Each of the sustainable development goals (SDG) has its own hue, its own colour. This transaction focusses on SDG 5, which is gender equality, and are referred to as Orange bonds – orange being the hue for SGD 5. In addition, IIX has developed its own framework and principles to really drive that S in the ESG,” he added.

Tracking societal impact

There is still a key issue on how to track the impact of where the money ends up.

IIX’s due diligence process includes interviews with beneficiaries and stakeholders of investees,  using its own digital impact assessment tool to incorporate input from a broad group of female beneficiaries. This verifies impact claims while giving a voice and value to the women it is assisting, according to Kraybill.

He continued: “Our selection process for projects funded through WLB6 closely aligns with the objectives of The Orange Movement. Each of the bonds in the WLB Series adheres to The Orange Bond Principles, which focuses on empowering women, girls, and gender minorities, particularly in climate action and adaptation.”

IIX looks at the potential of each project’s mission, vision, goals, and business structure, to evaluate alignment with the core values of the WLB Series and The Orange Movement. Its impact assessment team conducts due diligence to ensure selected projects meet criteria outlined by The Orange Movement and contribute to promoting gender equity and addressing climate challenges in emerging markets, according to Kraybill.

With the rise of bonds connected to ESG and DEI, the scrutiny from investors is also increasing, especially with the prevalence of greenwashing. 

Clifford Chance’s Deiner said: “The legal landscape for green bonds and sustainability-linked bonds has evolved considerably in recent years, particularly regarding due diligence. When a company issues a green bond under a green bond framework, substantial work is required to ensure the bond’s integrity. This diligence has become a critical factor in investment decisions, as investors need to be confident that the environmental credentials are genuine and not merely an instance of greenwashing.”

“One of the key parts of the Orange bond initiative is achieving transparency in the investment process and decision, and the subsequent reporting, as the proceeds are going to an issuer who is on-lending it again, to, for example, a microfinance lender. It’s a combination of seeking an investment return and a view on the credit profile. The funds have specific objectives regarding capital allocation, and the appeal of the Orange bond aspect aligns with this focus,” Deiner added. 

$10 billion goal

The IIX has an ambitious goal of mobilising $10 billion by 2030 and optimism abounds. 

Kraybill said: “We remain optimistic about reaching our ambitious goal through sustained collaboration and concerted action, empowering women and girls worldwide while fostering inclusive and sustainable development.”

“Partnerships with the Orange Bond Steering Committee organisations, like the Australian government’s Department of Foreign Affairs and Trade (DFAT), the UN Capital Development Fund (UNCDF), Nuveen, and others, are vital in this endeavour. Together, we aim to build a gender-empowered financing system, mobilise new capital, and accelerate progress toward gender equality and women’s empowerment globally,” Kraybill added.

The Orange Movement is also building “Orange Alliances” at regional and national levels to bring together gender lens investors and other stakeholders. IIX is conducting training programs to train and certify Orange Bond verification agents.

“We’re introducing an “Orange Seal” for MSMEs and other organisations, which enhances their gender, DEI, and climate bona fides. We have expanded our transaction tagging functionality to include innovative finance instruments that adhere to the Orange Bond Principles framework. Furthermore, we’re eagerly anticipating the launch of the Orange Loan Facility, alongside numerous other initiatives to further the Orange Movement’s mission,” Kraybill said. 

He said: “We remain optimistic about reaching our ambitious goal through sustained collaboration and concerted action, empowering women and girls worldwide while fostering inclusive and sustainable development.”

The next bond could potentially be much larger than WLB6’s $100 million. 

Clifford Chance’s Deiner is also optimistic: “There’s a flow of transactions that we’re going to see over the next 12 months, and this an area that people are paying more attention to. The transactions have grown considerably over the years. These transactions have involved deals from around $20 million up to the latest offering of $100 million. So, there is clearly increasing demand for these transactions each year.”

Standard Chartered declined to provide a comment for the article.


¬ Haymarket Media Limited. All rights reserved.

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IWD Deal Analysis: IIX’s WLB6 Orange Bond helping women’s livelihoods in Asia | FinanceAsia

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In a growing regional trend, December 2023 saw the sixth issuance of Impact Investment Exchange (IIX)’s Women’s Livelihood Bond (WLB) Series, the $100 million Women’s Livelihood Bond 6 (WLB6).

Altogether the IIX, since 2017, has raised $228 million to support women’s economic empowerment in Asia, with the overall trend in deal size on an upward trend. FinanceAsia discussed the investors, the rationale and the processes involved in order to celebrate International Women’s Day (IWD) 2024 on Friday, March 9 and the drive towards diversity, equity and inclusion (DEI) across the region. 

The closing of WLB6 marked the world’s largest sustainable debt security and was issued in compliance with the Orange Bond Principle and aims to uplift over 880,000 women and girls in the Global South.

Global law firm Clifford Chance advised Australia and New Zealand Banking Group (ANZ) and Standard Chartered Bank pro bono as placement agents.

Proceeds from WLB6 will be used to promote the growth of women-focused businesses and sustainable livelihoods across six sectors: agriculture; water and sanitation; clean energy; affordable housing; SME lending and microfinance across India, Cambodia, Indonesia, Kenya and Vietnam. 100% of the $100 million proceeds designed to advance UN’s Sustainable Development Goals (SDG) 5: gender equality and 25-30% designed to advance SDG 13 — climate action.

Robert Kraybill, chief investment officer, IIX, told FA: “The Women’s Livelihood Bond (WLB) Series is a blended finance instrument that pools capital from public-sector development finance institutions and private-sector investors. The public sector investors provide risk-tolerant “first-loss” capital in the form of subordinated notes, while the private sector investors purchase the senior bonds.”

“The WLB Series targets a range of private sector investors seeking a combination of high impact with low risk and an appropriate return. From the outset, beginning with the WLB1, the bonds have attracted both family offices and institutional investors. Initially, this was skewed towards family offices. As the WLB issuances increased, we saw increased interest from institutional investors, such that over 90% of the WLB6 was placed with institutions,” added Kraybill. 

For WLB6, there were global investors on the deal including from the US, Europe and Asia Pacific (Apac). The WLB6 bonds comply with the EU and UK securitisation regulations, making it easier for European institutional investors to participate. For example, one of the investors was Dutch pension fund APG Asset Management which invested $30 million.

Kraybill said: “Throughout building the loan portfolios for the WLBs – from sourcing and screening to due diligence – we integrate traditional credit criteria with impact criteria. We look to invest in companies meeting our credit and financial criteria while delivering meaningful positive impact.”

“We are proud that we have not experienced any payment defaults or credit losses on any of the WLB loan portfolios, demonstrating the resilience of the high-impact women-focused businesses that we work with, even in the face of challenges posed by the Covid-19 pandemic. The first two bonds in the WLB Series – WLB1 and WLB2 – have matured and been fully retired, meeting all of their obligations to bondholders,” Kraybill added. 

The IIX, which is headquartered in Singapore and has offices in Australia, Bangladesh, Brunei, India, Indonesia, the Philippines, Sri Lanka and Vietnam, also tracks the impact outcomes generated by its investment throughout the life of the bonds and reports on the targets. WLB1 and WLB2 exceeded impact projections, according to IIX.   

Complex deal

Given the number of parties involved and a myriad of regulations and compliance, the deal was not easy to put together. 

Gareth Deiner, partner at Clifford Chance, explained to FA the law firm’s role in the deal: “We’ve been involved for several years on these transactions, and this is not the first woman’s livelihood bond that the IIX team has put together.”

Singapore-based Deiner continued: “Historically, we have acted on the trustee side, but we have been advising the lead managers of the transaction for the last three offerings. It’s approximately a three to four month execution process to make sure we get the documentation agreed and the structure in place. IIX do the underlying due diligence on the borrowers, which is necessary given that the financing is raised from the international capital markets. Together with their counsel, they work on the disclosure in the offering document for the bond transaction.”

“As counsel to the lead managers, we are responsible for the underlying contractual documentation for the notes and the offering, but it’s IIX who retain control over the loan documentation with the notes proceeds end-users, and putting the loan pool together. They’re doing due diligence on the on the underlying borrowers of the deal,” he explained. 

This is backed up by IIX’s due diligence. IIX’s Kraybill explained: “The financial due diligence conducted by our credit team is similar to that of other emerging market lenders. What sets us apart is the upfront impact due diligence and ongoing impact monitoring and reporting conducted by our impact assessment team. Our team screens potential investments against rigorous eligibility criteria to ensure they contribute to positive outcomes for underserved women and gender minorities in the Global South while often empowering women as agents of climate action.”

Navigating US legal rules and dealing with investors from around the world also added to the complexity. 

Deiner said: “Dealing with a wide range of investors, including qualified institutional buyers in the US, we needed to comply with US federal securities law, including limiting the sale of the notes to qualified purchasers under the US Investment Company Act. There were also certain structural considerations raised by the EU and UK securitisation regulation.”

“From a legal perspective, it was an interesting deal because there’s a wide range of highly technical substantive law, which required the input from specialists across the Clifford Chance network. We have the expertise across the globe and do a lot of sustainable financing work,” continued Deiner. 

“Recently we’ve advised on some market-leading and groundbreaking transactions in terms of bringing sustainability finance technology to capital markets transactions,” he added.

However, this deal, in particular involved social governance goals. 

Deiner explained: “What we like about this particular transaction is that so much of the Environmental Social and Governance (ESG) agenda is about the environmental (E) angle, such as green bonds related to carbon transition and climate action. That encompasses sustainable  development goal 13 of the UN Sustainable Development Goals (SDG).”

“However, you rarely hear about sustainable finance transactions that focus on the S and the G in ESG, which IIX champions. Each of the sustainable development goals (SDG) has its own hue, its own colour. This transaction focusses on SDG 5, which is gender equality, and are referred to as Orange bonds – orange being the hue for SGD 5. In addition, IIX has developed its own framework and principles to really drive that S in the ESG,” he added.

Tracking societal impact

There is still a key issue on how to track the impact of where the money ends up.

IIX’s due diligence process includes interviews with beneficiaries and stakeholders of investees,  using its own digital impact assessment tool to incorporate input from a broad group of female beneficiaries. This verifies impact claims while giving a voice and value to the women it is assisting, according to Kraybill.

He continued: “Our selection process for projects funded through WLB6 closely aligns with the objectives of The Orange Movement. Each of the bonds in the WLB Series adheres to The Orange Bond Principles, which focuses on empowering women, girls, and gender minorities, particularly in climate action and adaptation.”

IIX looks at the potential of each project’s mission, vision, goals, and business structure, to evaluate alignment with the core values of the WLB Series and The Orange Movement. Its impact assessment team conducts due diligence to ensure selected projects meet criteria outlined by The Orange Movement and contribute to promoting gender equity and addressing climate challenges in emerging markets, according to Kraybill.

With the rise of bonds connected to ESG and DEI, the scrutiny from investors is also increasing, especially with the prevalence of greenwashing. 

Clifford Chance’s Deiner said: “The legal landscape for green bonds and sustainability-linked bonds has evolved considerably in recent years, particularly regarding due diligence. When a company issues a green bond under a green bond framework, substantial work is required to ensure the bond’s integrity. This diligence has become a critical factor in investment decisions, as investors need to be confident that the environmental credentials are genuine and not merely an instance of greenwashing.”

“One of the key parts of the Orange bond initiative is achieving transparency in the investment process and decision, and the subsequent reporting, as the proceeds are going to an issuer who is on-lending it again, to, for example, a microfinance lender. It’s a combination of seeking an investment return and a view on the credit profile. The funds have specific objectives regarding capital allocation, and the appeal of the Orange bond aspect aligns with this focus,” Deiner added. 

$10 billion goal

The IIX has an ambitious goal of mobilising $10 billion by 2030 and optimism abounds. 

Kraybill said: “We remain optimistic about reaching our ambitious goal through sustained collaboration and concerted action, empowering women and girls worldwide while fostering inclusive and sustainable development.”

“Partnerships with the Orange Bond Steering Committee organisations, like the Australian government’s Department of Foreign Affairs and Trade (DFAT), the UN Capital Development Fund (UNCDF), Nuveen, and others, are vital in this endeavour. Together, we aim to build a gender-empowered financing system, mobilise new capital, and accelerate progress toward gender equality and women’s empowerment globally,” Kraybill added.

The Orange Movement is also building “Orange Alliances” at regional and national levels to bring together gender lens investors and other stakeholders. IIX is conducting training programs to train and certify Orange Bond verification agents.

“We’re introducing an “Orange Seal” for MSMEs and other organisations, which enhances their gender, DEI, and climate bona fides. We have expanded our transaction tagging functionality to include innovative finance instruments that adhere to the Orange Bond Principles framework. Furthermore, we’re eagerly anticipating the launch of the Orange Loan Facility, alongside numerous other initiatives to further the Orange Movement’s mission,” Kraybill said. 

He said: “We remain optimistic about reaching our ambitious goal through sustained collaboration and concerted action, empowering women and girls worldwide while fostering inclusive and sustainable development.”

The next bond could potentially be much larger than WLB6’s $100 million. 

Clifford Chance’s Deiner is also optimistic: “There’s a flow of transactions that we’re going to see over the next 12 months, and this an area that people are paying more attention to. The transactions have grown considerably over the years. These transactions have involved deals from around $20 million up to the latest offering of $100 million. So, there is clearly increasing demand for these transactions each year.”

Standard Chartered declined to provide a comment for the article.


¬ Haymarket Media Limited. All rights reserved.

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Parties set sights on general debate

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In: South-East Asia

Oppositon cites lack of policy progress

PUBLISHED : 7 Mar 2024 at 04:00

The opposition is seeking a general debate — instead of a censure debate — against the government over its alleged lack of progress in implementing core policies declared in parliament when it took office half a year ago.

The decision was reached yesterday at a meeting of the six opposition parties, namely Move Forward Party (MFP), Democrat Party, Thai Sang Thai Party (TSTP), Fair Party, Thai Teachers for People Party and New Party.

Unlike the no-confidence debate which is allowed under Section 151 of the constitution, the general debate under Section 152 does not require a censure vote to be cast on targeted cabinet ministers.

On March 13, the opposition is expected to file a motion calling for the debate, likely to last two days. It may take place between April 3 and 5, said opposition leader Chaithawat Tulathon who also leads the MFP.

He said April 3-5 marks an ideal timeframe for a debate because the second and third readings of the 2024 fiscal budget bill are expected from March 27-28 while the current parliamentary session is due to end on April 9, he said.

At this point, the opposition parties are narrowing down the debate topics and the work will be finalised later, he said.

“In short, this government has been in office for almost half a year, but it has yet to seriously begin honouring the promises it made to voters.

“It keeps ignoring the responsibility of implementing policies the coalition had declared in parliament,” Mr Chaithawat said.

Chaichana Detdacho, a Democrat MP for Nakhon Si Thammarat and deputy party leader, said the party is focusing on the government’s justice affairs which would include controversies surrounding the Ministry of Justice’s handling of former prime minister Thaksin Shinawatra’s hospital detention and subsequent issuing of the former premier’s parole.

The government made no real progress regarding policies it has pledged to deliver since assuming office, said Kritdithat Saengthanayothin, list-MP and leader of the New Party.

In the coming debate, he would zero in on the government’s inability to tackle the loan shark problem which the government has vowed to stamp out under its public debt alleviation policy, said the opposition MP.

Even though the government’s main problem is a lack of progress in policy implementation, which might not warrant solid evidence to prove as would a debate on suspected corruption, the opposition’s general debate would still present real evidence, said Mr Chaithawat.

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ComLink+ to be extended to lower-income families not living in rental housing

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In: South-East Asia

SINGAPORE: ComLink+ will be extended to more needy families, including those not living in public rental housing, the Ministry of Social and Family Development (MSF) said on Wednesday (Mar 6).

ComLink+ is a government programme that provides financial help to lower-income families, tied to four conditions or “progress packages”. These are getting a stable job, enrolling children in preschools, paying off debt and saving up for a home.

The scheme currently serves about 10,000 families in public rental flats. It will be expanded to include 3,000 more families who do not live in these flats but are eligible for the KidSTART or UPLIFT Community Network programmes – two government programmes catering to children of lower-income households. 

“These families face similar challenges as our ComLink+ families and would also benefit from family coach support and the ComLink+ progress packages,” said Senior Parliamentary Secretary Eric Chua in parliament on Wednesday. 

Families are provided with coaches who work with them on achieving set goals. There are 120 family coaches now and MSF will recruit another 200.

About 1,600 volunteer befrienders work alongside the family coaches, said Mr Chua. Each family coach is expected to support between 25 and 35 families, meeting with them at least once to twice a month at the start. 

CDA TOP-UPS OF UP TO S$3,700

The four progress packages were announced last year, and the preschool education package will be the first to be launched in the second half of this year. 

Under this package, a family will receive up to S$3,700 (US$2,750) in each eligible child’s Child Development Account (CDA) – a one-time top-up of S$500 if the child is enrolled in preschool the year they turn three, and S$200 each quarter if the child attends at least 75 per cent of school days.

These top-ups will be funded by the DBS Foundation and the government will match contributions. This means each child can start primary school with up to an additional S$7,400 in their CDA, which can be used for insurance, education and medical expenses.

“I would like to emphasise that the parents do not need to make any monetary contribution. All they need to do is to enrol and send their child to preschool regularly,” said Mr Chua. 

In the employment package, adults could receive payouts of up to S$600 every quarter if they secure a job and stay employed. Those who make voluntary contributions to their Central Provident Fund (CPF) accounts will also receive matching government grants to grow their savings for home ownership.

This package and the other two on paying off debt and saving up for a home will be launched progressively from next year.

The packages will be trialled for three years to assess their effectiveness, said MSF. 

The ministry will also review the family services landscape, announced Minister for Social and Family Development Masagos Zulkifli on Wednesday. 

A total of 47 Family Service Centres across Singapore now provide social services support for vulnerable individuals and families. There are also more than 10 different MSF-funded programmes run by about 30 social service agencies. 

While social service agencies try to coordinate with each other, families may still find it tedious to interface with multiple partners, said Mr Masagos. 

“Another concern is that we may not always be addressing the underlying issues, as each partner is focused on tackling the issue at hand,” he added. 

The review will look into doing away with the need for families to interact with multiple agencies. 

“Our vision is for families in need to receive support through a single primary touchpoint for family services who can address the needs of different family members in a holistic and more coordinated manner, to achieve better outcomes for the entire family,” said Mr Masagos. 

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Next US financial crisis could look like the last – Asia Times

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In: Asia

This is the second part of a three-part series

During the last financial crisis, Carmen Reinhart and Kenneth Rogoff, both now teaching at the Charles River campus of Plagiarism University, wrote an engagingly readable and well-received book, This Time is Different (2009), describing ways in which debt boom and default cycles have varied little since the Middle Ages. 

The most amusing of these similarities is that those who profit most from each such cycle’s bubble phase sustain it by assuring the gullible that this debt bubble, unlike all its predecessors, will not end badly – that this time is different.

Reinhart’s and Rogoff’s warning seems best appreciated as reverse-reprising Tolstoy’s bon mot, in “Anna Karenina”, that although “all happy families are alike, every unhappy family is unhappy in its own way.” 

Although all debt bubbles end unhappily, the happy thoughts used to assure each bubble’s victims that it will not end unhappily must differ enough from the happy thoughts used to sustain recent previous bubbles to seem credible, at least to the gullible.

If a US financial crisis occurs in 2024, it will be novel in certain ways. Of these, the most widely anticipated is that it will occur electronically.  Fear that fast transactions via the Internet and “disinformation” via insufficiently censored electronic media might cause bank runs to spread rapidly have recently troubled elites both in the US and Europe.

Less widely discussed is the possibility that the alienation of customers by the growing electronic automation of financial institutions could aggravate a financial crisis.

During the past decade, bankers and brokers have increasingly hidden from depositors behind websites that often function poorly and phone answering services that often have long wait times and ill-trained staff. This has coincided with the closing of so many branch offices as to give rise to a new financial term, “banking desert,” to describe any of the increasingly numerous and large areas with no physical banking services in which millions of disproportionately lower-income Americans now live.

As an executive of a US-based digital services firm recently observed in discussing the limits of bank automation, having human contact with staff gives a bank’s depositors more confidence in the bank. What might move a depositor to trust bankers who hide from him behind new infotech, and whom he never meets in person? And how can a banking desert dweller tell a failing bank from a bank whose website is dysfunctional or whose phone service wait time is impossibly long? 

It seems not to have occurred to America’s ruling elites that the automation of banking might aggravate a banking crisis in these ways. Perhaps that’s because folks who live in America’s wealthier towns and neighborhoods not only still have branch banks, but increasingly have branch banks newly redesigned to include coffee bars and social lounges.  Only from working-class stiffs do bankers hide behind websites and phone banks.

A more important novel aspect of any 2024 financial crisis is that it will occur after the widely touted but still little-tested replacement of taxpayer-funded bank bailouts by financial industry-funded bank “bail-ins” authorized by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, and implemented by Title 12, Part 380, of the Code of Federal Regulations, promulgated on January 25, 2011.

Title II of the Dodd-Frank Act, titled “Orderly Liquidation Authority,” authorizes the Federal Deposit Insurance Corporation (FDIC) to conduct “ball-in” liquidations, funded by the financial sector, of failed or failing banks or bank-like financial firms, in the hope of obviating taxpayer-funded bailouts. 

Title II authorizes the Secretary of the Treasury to put into FDIC receivership, pending liquidation, any bank or bank-like financial firm that is in default or deemed by the Secretary to be in danger of default, and the default of which may endanger general economic stability. 

Title II authorizes the FDIC to use the equity, debt securities or uninsured deposits of the financial firm in receivership, salaries or bonuses recently paid to that firm’s management or directors, or assessments levied on other financial firms, in order to honor that firm’s obligations to its employees and the government, including to the FDIC as insurer of its small depositors. 

The financial assets of the FDIC, which insures deposits of less than $250,000 at US banks, are grossly inadequate to respond to any large financial crisis either by bailouts or by bail-ins. As of June 30, 2023 (the most recent date for which relevant data seem to have been published), the FDIC’s Deposit Insurance Fund (DIF) had a balance of $119 billion. 

The aggregate face value of deposits at US banks was then and is now above $17 trillion. Authoritative data on the total face value of FDIC-insured deposits seem not to be publicly available but diverse observers have recently estimated that slightly more than half of US bank deposits are FDIC-insured. If so, then the FDIC’s contingent liabilities appear to exceed its assets available to cover those liabilities by a factor of at least 70.

Consequently, for the Secretary of the Treasury and the FDIC to respond to any systematic banking crisis in which many US banks default or are at risk of default – or in which even one of the largest US banks defaults or is at risk of default – entails expropriation of private financial assets.

Section 214 of the Dodd-Frank Act reads in full:

  • Liquidation required:  All financial companies put into receivership under this subchapter shall be liquidated. No taxpayer funds shall be used to prevent the liquidation of any financial company under this subchapter.
  • Recovery of funds:  All funds expended in the liquidation of a financial company under this subchapter shall be recovered from the disposition of assets of such financial company, or shall be the responsibility of the financial sector, through assessments.
  • No losses to taxpayers: Taxpayers shall bear no losses from the exercise of any authority under this subchapter.

However, section 206 of the Dodd-Frank Act requires that any action under Title II serve not merely interests specific to the company in receivership, but the stability of the economy as a whole. 

The task of deciding whose assets should be expropriated and whose should not be expropriated in the interest of general economic stability is not an enviable one. No matter how carefully such decisions are made, they may evoke public complaints and considerable resistance from within the far-from-powerless financial industry.

Any financial firm that owns either equity or debt securities issued by another financial firm in FDIC receivership or uninsured deposits in such a financial firm might cite Section 206 of the Dodd-Frank Act to argue that it should be exempted in whole or part from FDIC expropriation of those assets on the ground that their expropriation would increase its own risk of default, thereby imperiling the stability of the whole economy. 

Financial firms might even argue collectively – and plausibly – that the whole financial sector should be subjected to only minimal assessments to fund liquidations under Title II, on the grounds that to extract large assessments from banks in a time of systemically elevated risk of bank default tends further to elevate systematic bank default risk. 

This is particularly true insofar as such assessments increase – as provisions of Title II suggest that they should increase either over time or across firms – with the appraised risk of default by any financial firm from which such assessments are collected.

Any such limitation of assessments could leave the FDIC short of resources to cope with a serious financial crisis, impelling the Executive Branch to ask Congress once again to appropriate funds to bail out rather than to liquidate diverse financial institutions in danger of default. 

Inasmuch as bail-out funds would not be used to implement Title II of the Dodd-Frank Act, their appropriation would not be inconsistent with section 214 of that act, although a return to bailouts rather than bail-ins could effectively render Title II a dead letter.  

The FDIC, in its “orderly liquidation” of Silicon Valley Bank (SVB) and Signature Bank that began in March 2023, declined to use its authority under Title II to expropriate any of those banks’ uninsured deposits to help the FDIC provide insurance to those banks’ FDIC-insured deposits. The FDIC’s decision not to expropriate uninsured deposits generated public complaint.

However, the FDIC’s reason for not expropriating uninsured deposits in SVB and Signature Bank seems self-evident and underscores limitations on the FDIC’s implementation of Title II of the Dodd-Frank Act.

Had the FDIC expropriated uninsured deposits in those banks, then a non-negligible proportion of the nearly half of US bank deposits that are not FDIC-insured might have left the US banking system for some safer haven.  That could have threatened US economic stability by inducing a large and sudden contraction of bank lending, hence of the money supply, and hence of non-financial economic activity.

If, as it seems, the FDIC cannot prudently expropriate uninsured deposits of banks in FDIC receivership pending liquidation, then its resources for making good on its commitment to insure other deposits are limited to its own relatively tiny DIF, the equity and debt securities of the firms in receivership, and assessments levied on other financial firms. 

Nothing guarantees that these resources will prove adequate, in the event of a systematic financial crisis, to obviate the FDIC’s asking the President to ask Congress to appropriate funds for another financial-system bailout like that of October 2008 – especially if the financial industry resists new or increased FDIC assessments.   

Consequently, a third novel aspect of any 2024 financial crisis is that although, as in 2008, it may occasion an urgent demand by the President and Wall Street for another large bailout of the again-insolvent US financial industry, this request may come as a surprise to many voters and Congress members who have been led to suppose that Title II of the Dodd-Frank Act has lastingly obviated such bailouts by authorizing the FDIC to conduct bail-ins.

Thus, if this debt bubble is not different from 2008 in its unhappy ending, it will be different in the happy but untrue reason for which its unhappy ending was unexpected: widespread hope that a large financial sector default crisis could be ended by FDIC expropriation of uninsured deposits in failed banks or of assets of still-solvent financial firms will have been shown to be ill-founded.

So how might the House Republican Congress best respond to a 2024 bailout request? Any US financial crisis in 2024 bad enough to induce President Biden to take the politically perilous action of asking Congress to appropriate funds for another bailout of the US banking system will render Americans more receptive than ever before to novel notions about how such bailouts might lastingly be obviated. 

The 2008 taxpayer bailout of the rich and systematically corrupt US financial elite was so widely and intensely disliked by Americans that it spawned the Dodd-Frank effort to obviate such bailouts in future. If the Dodd-Frank bail-ins fail to obviate another similar bailout only 16 years later, then Americans will be even more desperate to find some way to obviate such bailouts lastingly.

If this session of Congress is asked to appropriate funds for another large financial system bailout, then the Republican Caucus of the House of Representatives, comprising a majority of that chamber’s members, will be particularly desperate for a means of lastingly obviating banking system bailouts. Only by finding some plausible means of doing that can the House Republican Caucus escape from the political dilemma in which it will find itself if this session of Congress is asked for a banking system bailout.

If the House Republican Caucus refuses to appropriate funds for a financial-system bailout needed to mitigate a foreseeably large and rapid incipient economic contraction being precipitated by a financial-sector default crisis, then the preponderance of public blame could shift from the Democrats to the Republicans. In arguing for such blame-shifting, the Democrats would have the overwhelming support of US financial, corporate, academic and media elites.

In addition, one could hardly overstate the temptations that the financial industry can offer to legislators who must fund re-election campaigns in a country where neither campaign contributions nor campaign spending can be restricted because the Supreme Court has ruled that money is speech.

On the other hand, another banking system bailout would be anathema to the increasingly populist and working-class voters who dominate the Republican Party’s primary elections.

Absent some novel and unprecedently persuasive reason to think that this banking system bailout will be the last banking system bailout, populists will oppose it as corporate welfare perpetuating a pseudo-democratic oligarchy that has impoverished American workers for decades in its pursuit of cheap foreign labor by free trade and immigration. 

Moreover, the affections of populist voters, if alienated by the support of another bank bailout, might prove past the power of campaign spending to regain.

Only by conditioning House Republicans’ support for another banking-system bailout on prior implementation of measures that would undoubtedly make that the last banking system bailout could the House Republican Caucus avoid blame for not mitigating an incipient economic contraction without alienating the populist voters who dominate Republican primary elections.

A solution to this dilemma is readily available and seems not only politically expedient but good for everyone in both the short and long terms. It also entails no additional government spending. 

The third and last part of this three-part series will describe that solution, which, although conceptually novel, is easy to understand and is based on widely-accepted financial and institutional economics theory. It is to enable private conversions of banks into a better kind of financial firm that is less prone to default and need no government insurance of its depositors. 

A financial sector made up of such firms, rather than of banks, would suffer fewer financial-system default crises and would not need government bailouts when it does experience such a crisis.

To induce the private sector to replace banks with such better financial firms, the federal government need only eliminate governmental obstacles to profitable private conversions of banks into such firms. The greatest governmental impediment to such conversions is FDIC insurance of bank deposits, which eliminates the greatest profit incentive for such conversions. 

The House Republican Caucus might best respond to any 2024 Biden administration request for a banking-system bailout appropriation by conditioning House approval of such a bailout on prior enactment of legislation of mandating imminent termination of FDIC insurance of bank deposits and of other governmental obstacles to profitable private conversion of banks into less default-prone firms that need no deposit insurance and which, after generally replacing banks, would make the financial system generate fewer default crises and not require government bailouts when such crises occur. 

Ichabod is a former US diplomat.

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China: What Li did and didn’t say at the NPC – Asia Times

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Investors already seem unimpressed by China’s pledge to grow around 5% this year. It’s not because of what Premier Li Qiang said about Asia’s biggest economy but rather what his National People’s Congress report failed to address.

Along with Beijing holding its fire on massive new stimulus, the report lacked new strategies to fix a property crisis exacerbating deflation. Nor did it detail fresh moves to strengthen China’s capital markets to stabilize sliding stocks.

Li’s report did contain many goodies that might normally send mainland stocks skyward. The gross domestic product (GDP) target is certainly ambitious given Japan is in recession, Europe is heading that way and US Federal Reserve rate cuts are off the table for now.

Plans to champion “high-quality development” augur well for increased innovation, research and development, green energy, cutting-edge manufacturing and, ultimately, higher disposable incomes across the nation.

Investors may be cheered by talk of generating 3% consumer price inflation, holding the fiscal deficit to 3%, creating 12 million urban jobs and increasing tech self-sufficiency as Washington tightens the screws. There’s hope, too, that the plan to issue one trillion yuan (US$139 billion) of ultra-long special central government bonds will boost consumption.

The work report that Li unveiled stressed that to be “well prepared for all risks and challenges,” the government is working to ensure that “internal drivers of development are being built up.”

As such, it said “we will implement a package of measures to defuse risks caused by existing debts and guard against risks arising from new debts.”

Beijing, it added, “will take prudent steps to defuse risks in small and medium financial institutions in some localities and take tough measures against illegal financial activities.”

Overall, Li “provided a largely positive review of the development” efforts, says Bert Hofman, a senior fellow at the National University of Singapore.

But little of note has been said so far about repairing the biggest cracks undermining the economy — and global investors’ confidence in it. These include a property crisis putting China in global headlines for all the wrong reasons and a $9 trillion mountain of local government financing vehicle (LGFVs) debt.

To economist Alicia Garcia-Herero at Natixis, the big takeaway is that the NPC “work report confirms the same growth target as last year, but without a plan.”

Of course, many investors would add to the list the steady reduction in transparency on President Xi Jinping’s watch. Though Li claimed Beijing will “vigorously promote” openness to information, Xi’s moves to tighten control over data, particularly among foreigners, aren’t helping.

Nor is China’s surprising decision to scrap the premier’s traditional press conference at the close of the NPC. It’s the first time that’s happened since 1993.

“China seems to be heading towards close-door policies with more opaqueness on economic policies,” says analyst Kelvin Wong, who publishes the Lighthouse Chronicle newsletter.

As such, he detects a “lack of any clear catalyst to kickstart a major bullish impulsive trend structure for China and Hong Kong benchmark stock indices.”

Without increased visibility on Beijing’s policy, Wong says, “China stock market and capital markets are likely to be shunned by international players,” except for those within the Belt and Road circle of nations.

Ruihan Huang, senior researcher at the Paulson Institute think tank, argues the NPC’s work report contained “good news for foreign investment.”

“Beijing will fully abolish restrictive measures on foreign investment access in the manufacturing sector and liberalize market access in services such as telecommunications and medical care.”

On the other hand, Huang adds, it’s noteworthy that amidst the persistently sluggish real estate market, Li omitted the phrase “houses are for living, not for speculation” this year. In 2023, then-premier Li Keqiang featured that phrase prominently.

China’s ambition, expressed by China’s 5% growth target, might indeed raise concerns that Team Xi might resort to putting short-term growth ahead of long-term reforms to avoid future boom-bust cycles.

Chinese Premier Li Qiang and President Xi Jinping in March 2023. Photo: Xinhua

Lynn Song, greater China chief economist at ING Bank, notes that with “pervasively downbeat sentiment and property market weakness remaining an overhang, reaching 5% growth this year may be more difficult.” As such, her team expects to see “a moderate level of policy support.”

Yet moving China beyond those up-down GDP cycles requires reading the cracks underneath the economy. And with action, not slogans.

It’s grand that Xi and Li favor “higher productivity” and “high quality” growth. It’s another thing to do the heavy lifting to achieve it, China watchers say.

By her reading, Garcia-Herero at Natixis says Tuesday’s proceedings offered “no stimulus — the fiscal deficit even lower — no liberalization, nothing.”

On Tuesday, Li acknowledged that China’s economic performance faces “difficulties” that have “yet to be resolved.” Li even detailed where the cracks lie, saying that “risks and potential dangers in real estate, local government debt, and small and medium financial institutions were acute in some areas. Under these circumstances, we faced considerably more dilemmas in making policy decisions and doing our work.”

One problem, of course, is a lack of trust in China’s economy at a moment when Xi’s party is muddying foreign investors’ ability to discern the true fundamentals of the economy. Already, for example, there are doubts among analysts that China really grew at the 5.2% rate Beijing claims in 2023.

“A lot of economists think the numbers are completely fabricated. The idea of 5.2% or 5.5% growth is [very] likely wrong,” says Andrew Collier, managing director at research firm Orient Capital, told BBC. “It’s more like 1% or 2%.”

Though that may seem overly pessimistic, Collier speaks for many when he says “I think the next five or 10 years is going to be difficult.”

That’s in part due to an intensifying US-China trade war. In Washington, President Joe Biden’s White House continues to limit China Inc’s access to semiconductors and other vital technology – and US investors’ ability to invest in mainland tech firms.

On Tuesday, Beijing reaffirmed its overriding goal of becoming self-reliant in chipmaking and artificial intelligence in order to compete with the West.

The central government is boosting spending on technology and scientific research by 10% to nearly US$52 billion this year. Along with promoting national champions, the plan involves giving key enterprises a pivotal role in driving the policy.

“We will fully leverage the strengths of the new system for mobilizing resources nationwide to raise China’s capacity for innovation across the board,” Li’s report as delivered to lawmakers said.

“We will pool our country’s strategic scientific and technological strength and non-governmental innovation resources to make breakthroughs in core technologies in key fields and step up research on disruptive and frontier technologies.”

Yet underneath these worthy goals is a financial system still misallocating capital, damaging confidence among foreign investors and undermining domestic business and household confidence.

In February alone, the value of new home sales plunged 60% from a year earlier. That followed a more than 34% drop in the previous month.

China’s property market is a growing drag on the economy. Image: Screengrab / CNBC

Because real estate is the main asset in which Chinese invest, plunging property values are undermining consumption at a moment when Xi and Li hope to boost domestic demand.

As such, Beijing must detail plans to accelerate steps to repair the housing sector and to get bad assets off property developers’ balance sheets.

It’s vital, too, that Xi and Li find ways to reassure global asset managers that the roughly $7 trillion stock rout between 2021 and last month won’t continue. Beijing’s deployment of the “national team” of state funds to buy shares won’t renew confidence in the long run. That, analysts say, requires bold policy changes.

That’s why, for now, economists at HSBC think “recent market turmoil may prompt more decisive and quick moves by the national team to help restore confidence and prevent a self-fulfilling cycle.”

Yet decisive and quick moves seemed in short supply Tuesday. The same goes for altering the narrative on deflation.

“Once the expectation for further deflation is formed, consumers and investors will cut back on their spending,” says Gene Ma, head of China research at the Institute of International Economics. “Deflation will reduce the nominal GDP and thus raise the debt/GDP ratio and exacerbate the debt overhang.”

Ma argues that “the falling asset prices and negative wealth effect are hurting investment and consumption. The falling asset value relative to liability may force businesses and households to repay their debts to deleverage, making monetary easing like pushing on a string. Moreover, deflation causes weaker corporate earnings, rising defaults, and deteriorating bank asset quality, which in turn could lead to credit contraction.”

The People’s Bank of China has responded with cuts to required reserve rates and official interest rates. However, Ma says, “the producer price inflation-adjusted real lending rates remained elevated at 6.6% in the fourth quarter. We think a lot more forceful policy measures are needed to prevent deflation from doing more damage. The PBOC should explicitly anchor the inflation expectations by introducing an inflation target of 2% to 3%.”

So far in 2024, the PBOC has been reluctant to ease assertively. One reason is Xi’s determination to keep the yuan from falling. That, Xi’s inner circle apparently worries, would squander progress made in building global trust in the yuan and anger Washington head of a contentious election.

Another is fear of incentivizing bad lending and borrowing behavior. The liquidity bursts that are flowing from the PBOC have been enough to tame bond market dynamics but not stabilize Shanghai stocks.

Part of the rationale seems to be that China can do the bare minimum to stabilize stocks and keep GDP as close to 5% as possible. The restrained nature of policy moves, though, appears positive for bond markets and negative for stocks.

Hence the benchmark’s sharp swings up and down on Tuesday. The Hang Seng China Enterprises Index dipped as much as 2.6%, the most in more than a month.

The good news: Xi and Li still have another week of NPC festivities to lay out a clear and coherent plan to repair a cratering property market and restore trust in the stock market. All global markets can do is hope that they use it.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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National People’s Congress: China sets ambitious economic target for 2024

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Li QiangGetty Images
By Peter Hoskins
Business reporter

China has set an ambitious growth target of around 5% for this year, as it announced a series of measures aimed at boosting its flagging economy.

Premier Li Qiang made the announcement at the opening of the annual National People’s Congress (NPC) on Tuesday.

Mr Li acknowledged that China’s economic performance had faced “difficulties”, adding that many of these had “yet to be resolved”.

It comes as China struggles to reinvigorate its once-booming economy.

“Risks and potential dangers in real estate, local government debt, and small and medium financial institutions were acute in some areas,” he said. “Under these circumstances, we faced considerably more dilemmas in making policy decisions and doing our work.”

A series of other measures to help tackle the country’s slow recovery from the pandemic were also outlined, including the development of new initiatives to tackle problems in the country’s crisis-hit property sector. Beijing also aims to add 12 million jobs in urban areas.

Regulation of financial market will also be stepped up, said Premier Li, while research will stepped up in new technologies, including artificial intelligence (AI) and life sciences.

For decades the Chinese economy expanded at a stellar rate, with official figures putting its gross domestic product (GDP) growing at an average of close to 10% a year.

On the way it overtook Japan to become the world’s second largest economy, with Beijing claiming that it had lifted hundreds of millions of people out of poverty.

Beijing says that last year the economy grew by 5.2%, which even at that level is low for China. However, some critics argue the real figure could be less than a third of that.

“I think the next five or ten years is going to be difficult,” Andrew Collier Managing Director from China research firm Orient Capital Research told the BBC.

“A lot of economists think the numbers are completely fabricated. The idea of 5.2% or 5.5% growth is much likely wrong. It’s more like 1% or 2%,” he adds.

Whichever figures are accurate, it is clear that this vast country and its leaders face a daunting array of economic challenges.

That list includes a property market in crisis, a shaky stock market, high youth unemployment and the threat of deflation as consumer prices continue to fall.

Those immediate problems are compounded by longer term issues from trade and geopolitical tensions to China’s falling birth rate and aging population.

Economic challenges

The most serious of the challenges are those associated with the housing market, which according to the International Monetary Fund (IMF) accounts for around 20% of the economy.

It is a major problem “not just for property developers but also the regional banks that are highly exposed to it,” Dan Wang, chief economist of Hang Seng Bank (China), says.

The real estate industry crisis was highlighted last week when the country’s biggest private developer Country Garden was hit with a winding-up petition in Hong Kong by a creditor.

It came just a month after debt-laden rival Evergrande was ordered to liquidate by a court in the city.

Evergrande

Getty Images

And while much of the rest of the world has struggled with soaring prices in the wake of the pandemic, China was one of the few major economies to avoid high inflation.

Now though it is having to deal with the opposite problem – persistently falling prices or deflation.

Consumer prices in China fell in January at the fastest pace in almost 15 years, marking the fourth month in a row of declines.

It was the sharpest drop since September 2009, when the world economy was still reeling from the effects of the global financial crisis.

Deflation is bad for economies as it can mean that people keep putting off buying big ticket items, like washing machines or cars, on the expectation that they will be cheaper in the future.

It also has an impact on people and businesses with debts. Prices and incomes may fall, but debts do not. For a company with falling revenue, or a household with a declining income, debt payments become more of a burden.

All of this means China is lacking something vital to a strong economy: confidence. And authorities have been scrambling to reassure investors and consumers.

“Messaging from policymakers continues to be about restoring confidence and domestic demand,” Catherine Yeung from Fidelity International told the BBC.

So far that has meant a series of relatively small measures targeting different parts of the economy.

This year alone, borrowing costs have been cut and direct support offered to developers along with other actions to tackle the property crisis.

Earlier this month, in a shock move, the head of China’s stock market regulator was replaced, in what was seen as a signal that the government was ready to take forceful measures to end the rout in its $8 trillion stock market.

Officials have also moved to clamp down on traders betting against shares in Chinese companies, and imposed new rules on selling shares at the start and end of the trading day.

An aging population and a delicate geopolitical balance

Beyond these immediate issues China also faces a number of more far-reaching challenges, including slowing productivity growth and an aging population.

“The demographic dynamics are quite unfavourable, with the population aging fast due to the one child policy,” Qian Wang, chief Asia-Pacific economist at investment firm Vanguard.

“Unlike Japan that got rich before it got old, China is getting old before it gets rich,” she adds.

There is also the seemingly intractable geopolitical issue of Taiwan.

Beijing sees self-ruled Taiwan as a breakaway province that will eventually be part of China, and has not ruled out the use of force to achieve this. But Taiwan sees itself as distinct from the Chinese mainland.

Taiwan is a key flashpoint in the tussle between China and the US for supremacy in Asia.

This, at the very least, greatly complicates China’s relations with the US and many other major Western economies.

There is also the ongoing trade dispute with the US, which started in 2018 under then-President Donald Trump and has shown no sign of easing during the Biden administration.

A potential second term in office for Mr Trump could well see a ramping up of tensions between Washington and Beijing.

Mr Trump, in characteristically hawkish comments about China, said he would impose more tariffs on its goods if he wins the US presidential election in November.

In an interview with Fox News, he said the tariffs could be in excess of 60%: “We have to do it,” he said.

Former President Donald Trump

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While that may make for plenty of headlines, Ms Yeung suggests financial markets may be able to take this in their stride.

“Most of this negative news has already been factored in to share valuations”, she says.

Whether Mr Xi’s long-term plans for China will turn around his country’s fortunes remains to be seen. What is clear though is that its more than 1.4 billion people are unlikely to enjoy a return to double digit annual growth, and the prosperity that comes with it, anytime soon.

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