Doom Loop

A virtueless circle in which banks take ever-greater risks to boost returns (secure in the knowledge the state will underwrite them), and governments are forced to break their promises “never again” to bankroll losses (further encouraging banks to take dangerous risks).

A senior Bank of England official has warned that the relationship between banks and the state is entering a vicious cycle, Edmund Conway reported in The Telegraph:

On the eve of the G20 meeting of finance ministers in Scotland, Andy Haldane, the Bank’s executive director for financial stability warned that the relationship between the state and banks represents a “doom loop” which will keep inflicting crises on the public unless arrested. …

Mr. Haldane, who was a key part of a Bank unit which was among the first to warn, well ahead of the crisis, of a dangerous gap between what banks had in their balance sheets and what they were lending customers, made the comments in a paper [PDF] written with Piergiorgio Alessandri, published on Friday.

The pair diagnosed five ways in which banks capitalised on the implicit state guarantee for the financial system, saying they were “the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state.”

The fact that governments repeatedly bail out economies and banks following crises also undermines their pledged of “never again,” they add.

“This adds to the cost of future crises. And the larger these costs, the lower the credibility of ‘never again’ announcements. This is a doom loop.”