Max Keiser has hit out against Deutsche Bank in the latest episode of his RT program Keiser Report, saying the bank was “technically insolvent”.
But whether a bank is technically solvent or not is a political decision. The euro currency is a political currency. It was a political decision to allow private banks a monopoly on the creation of money in the Eurozone.
A political decision by the German government and Bundesbank can ensure that ECB delivers liquidity to Deutsche Bank irrespective of its balance sheets. No bail out is needed. No closure of the bank is needed. Just a decision to change the insolvency rules to allow Deutsche Bank to continue to obtain liquidity and keep operating.
“With a balance sheet now eclipsing JP Morgan’s, Keiser warned that the bank will sooner or later have to admit to insolvency and say “we need either a huge bailout or we gotta close up shop,” says RT.
There are other options for Deutsche Bank under attack from hedge funds.
If changes in solvency rules are not possible, then some accounting rule changes are all that is needed to make Deutsche Bank technically solvent.
As I wrote in December 2011 when Austrian Bank Unicredit faced collapse, simple changes in accountancy rules and some creative accountancy can make any bank solvent on paper and save any bank from collapse.
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First, how exactly does a bank system collapse under current accountancy rules?
A bank becomes insolvent when a specific set of conditions is met under current accountancy rules ie it has too little core capital in relation to its loans.
The European Central Bank gives liquidity or banknotes to solvent banks. As soon as a bank becomes insolvent under current financial regulations, the liquidity dries up. No more money comes out of the cash machines. The economy collapses
How can we keep the European banks solvent on paper, money flowing from the banks and the economy stable?
To keep banks solvent, a new financial instument, a weapon of mass wealth creation, could be created – and very fast.
Right now, the world’s banks are laden down with 500 trillion dollars worth of paper debt.
The banking system has become a huge debt creation machine. Banks make money by passing this debt onto tax payers and, when they can no longer pay, seizing assets.
Accountancy rules have been set up to suit their needs.
The banks are interlinked in this debt creating machine and arranged their finances in such a way that if one mega banks goes, all the others collapse so holding the world hostage.
We need a quick change in accountancy rules to suit our needs and the needs of the real economy.
The strongest argument for keeping the euro right now is that it is too dangerous to dismantle. With some creative accountancy, the euro bomb could easily be defused.
How might such a new accountancy rule look which could defuse the bomb of 500 trillion in debt?
Under new accountany rules, banks should have to list expected future earnings (EFE). The banks would insure their expected future earnings with credit profit swaps (CPS) ie on paper they are guaranteed these future earnings. The total value of the credit profit swaps would be the equal to the 500 trillion in debt in the form of credit default swaps (CDS) and other financial gimmicks on on their books.
Banks would insure their EFE buying CPS from other banks, just as they now insure each other’s debt or CDS. To give some basis to the EFE, some expert can write some note or other testifying to EFE from a future gas field or such like.
Italian bank Unicredit, for example, is exposed to about 50 billion in Italian and other souvereign bonds. If any of these countries default, Unicredit has to write down the losses on its bonds and it becomes insolvent. The ECB no longer gives it liquidity. It has to close shop. Unicredit has branches in Munich and Vienna and an exposure to other banks. One bank after the other would become insolvent, shut up shop and the economy would collapse.
Austria’s banks have aggregate balance sheets four times larger than the country’s total annual economic output. FAZ notes that they are a risk to the state.
Using EFE and CPS, Unicredit could enter gigantic sums as active income and portfolio income. The bank would remain solvent on paper even if it had to write down ist losses on sovereign bonds. The ECB would continue to deliver liquidity.
People might object that this is all an outrageous sleight of hand.. But it is no more outrageous than the current accounting system when banks can create 500 trillion in debt.
This would only be a short term solution to buy time for the entire euro currency bomb to be defused.