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Bailouts Can Turn a Profit for Central Banks 

Andreas Utermann 

Global View 


The lender of last resort plays a critical—yet ultimately profitable—role in the face of banking or sovereign-debt crises, writes Global CIO Andreas Utermann.
While the costs of financial crises are all too evident in debtor markets, how much do bailouts really cost creditor countries? The question is particularly pertinent in light of the recent German Constitutional Court hearings regarding the legality of the ECB’s¹ outright monetary transactions and the renewed concern that Greece may require further financial assistance.

Just as banking crises tend to entail transfers of risk from the private to the public sector, sovereign debt crises involve supranational bodies such as the IMF² or, in the case of the European debt crisis, the ECB. Attention, though, tends to focus on the headline numbers involved – the money at risk – much more than on the likely, or indeed ultimate, net cost to the provider of financial support.

It is instructive to reflect on those net costs in OECD³ countries and to distinguish between governmental interventions – such as guarantees, equity stakes or nationalisation of institutions – and central bank activity – such as liquidity support, loans or asset purchases – as lenders of last resort.

Evidence for government guarantees and equity ownership is mixed, though costs generally prove less onerous than initially feared:
During the Nordic Banking Crisis in the early 1990s, the net cost to Finland was around 9 per cent of its GDP4 – somewhat less than the 13 per cent gross fiscal cost.
The US Treasury’s stake in AIG yielded a USD5 5 billion gain, and its investments in Citigroup and Bank of America a further USD 4.5 billion.
In the UK, the government’s investment in Lloyds Banking Group is now close to breakeven. The government made a GBP6 5 billion profit on RBS’s participation in the Asset Protection Scheme.

By contrast, the record of central banks as a lender of last resort is better, with bailouts typically ending up profitable:
The Hong Kong Monetary Authority bought HKD7 118 billion of assets 1998, including a 10 per cent stake in HSBC. It eventually made a gain of HKD 90 billion.
The US Treasury’s stake in AIG yielded a USD5 5 billion gain, and its investments in Citigroup and Bank of America a further USD 4.5 billion.
The Fed’s¹ purchase of nearly USD 30 billion of Bear Stearns assets in 2008 generated USD 6.6 billion. Fed loans to and asset purchases from AIG added USD 17.7 billion.
The BOE’s² Special Liquidity Scheme generated GBP 2.3 billion. Likewise, the BOE’s Asset Purchase Facility, which has accumulated more than GBP 31 billion, is expected to result in net gains in all but one of its published scenarios.
The ECB acquired EUR³ 276 billion in assets between 2009 and the end of 2011. These programmes should generate a net gain of EUR 70-80 billion.

Viewed in this light, the lender of last resort plays a critical yet ultimately rofitable role in the face of banking or sovereign debt crises. Should Greece require further financial assistance involving public participation for the first time, then at least some of the cost would be made good by the proceeds of the ECB’s earlier programmes. If this was better understood, then perhaps the popular opposition to, and the public discourse on, bailouts would be tempered.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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