CRISIS, CREDIT

AND BANKING SECTOR

Working Paper December 28th 2014
Non-professional english version
 CRISIS, CREDIT AND BANKING SECTOR

1. At the outbreak of the crisis in 2007, EKAI Center

anticipated that the response to any over-
indebtedness crisis is directly related to political
economy and, in particular, to the weight that
financial power holds in economic policy.

2. If economic policy obeys to general interest,

strategy to confront a financial crisis follows the
two basic objectives of maintaining productive
credit and restructuring banking sector.

3. This requires placing as a fundamental objective

making sure that credit flows to the productive
sector dodging banks in critical condition.
Providing public resources to the latter, either
through bank bailouts or through expansionary
monetary policy, is meaningless and involves
squandering vast resources, extracted from the
real economy in favor of the financial sector in
crisis. This is what basically has done over the
years in the whole of the West, this is
unfortunately what was expected to be done and
exactly the opposite of what needed to be done.

4. First of all, proper management of the financial

crisis required avoiding channeling public
resources to financial institutions in critical
condition. These banks must be restructured
safeguarding deposits under a system of
responsibility for investors similar to "bail-in" that
EKAI Center has been proposing since 2008 and
that has not been approved by the European
Union until 2014.
 CRISIS, CREDIT AND BANKING SECTOR

5. Secondly, credit flow should be guaranteed

through any of the following four fundamental
approaches:

a) healthy financial institutions,

b) public deposit banks,

c) public promotional banks,

d) public credit.

6. Healthy financial institutions are an appropriate

way of channeling public resources as their
balance sheet structure allows them to direct
towards real economy the resources they receive.
Contrary to what has been done during this crisis,
in financial crises, banks in critical situation
should not be recipients of public resources but,
on the contrary, healthy financial institutions.

7. Public deposit banks are also a very adequate

instrument to keep credit flowing, since public
control ensures that, regardless of the status of
their assets and liabilities, resources are
channeled towards productive credit.

8. Public promotional banks, either existing before

the crisis or created as a response to it, can
allocate public resources, or raise funds in the
market, to any specific destination in the
productive sector.
 CRISIS, CREDIT AND BANKING SECTOR

9. Finally, public credit generated by monetary

policy is a key instrument for the reactivation of
credit, provided that -unlike what neo-keynesians
use to say- destinations of monetary expansion
are perfectly delimited and, in particular, are used
for channeling no to financial institutions in
difficulty but, on the contrary, to sound financial
institutions, public deposit banks or public
promotional banks.

10. Seven years after the outbreak of the crisis,

paralysis of credit, over-indebtedness and risk in
the financial sector continue at levels of 2007. It is
not surprising taking account of policies
developed both in Europe and in USA. As
anticipated by EKAI Center in 2007, that was
expected in a model of society in which the
banking sector in crisis controls public policy by
itself.

11. Attempts by European advanced industry to

advance in the restructuring of the banking sector
during 2008-2010 collided with the central
financial power and finally gave way to a
combination of bank bailouts and austerity
policies. A combination that has only been useful
to gain time, avoiding bankruptcy in the financial
sector and the destruction of real economy over
these years.

12. Once both bail-out and monetary expansion

policies have been exhausted, the restructuring of
the banking sector that should have been
addressed since the outbreak of the crisis will be,
 CRISIS, CREDIT AND BANKING SECTOR

henceforth, unavoidable. These policies being

implemented sooner or later will depend on the
extent to which Western politicians are able to
achieve and defend a sufficient level of political
autonomy in protecting the interests of
businesses, citizens and governments.

As a Working Paper, it does not reflect any institutional position or opinion neither
of EKAI Center, nor of its sponsors or supporting entities.
EKAI Center seeks to do business with companies or governments covered in its
reports. Readers should be aware that we may have a conflict of interest that could
affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision.
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