Iceland and China, Department of Uh -Oh

One of the most stunning and shocking findings of the Icelandic SIC report was the widespread use of shares as collaterals for loans in all Icelandic banks, small and large but most notably the three largest ones – Kaupthing, Landsbanki and Glitnir.

It is necessary to distinguish between two types of lending against shares as practiced in Iceland: one is a bank funding purchase of its own shares, with only the shares as collaterals. The other type is taking other shares as collaterals.

These loans with shares as collaterals were mainly offered to the banks’ largest shareholders – in the big banks these were the main Icelandic business leaders – their partners and bank managers. In the smaller banks local business magnates who in many cases were partners to those Icelandic businessmen who operated abroad, as well as in Iceland. Thus, this practice defined a two tier banking system: with services like these to a small group of clients – that I have called the “favoured clients” – and then normal services for anyone else.

As a general banking model it would not make sense – the risk is far too great.

That is from Sigrún Davíðsdóttir, there is much more at the link.

Comments

Yes this is what happens when greed combines with hubiris and a disregard for basic accounting. There are many examples of this type of "we have discovered an easy way to make money" scheme. Think Enron.
Given the Wild West nature of the China economic expansion and the elite nature of government I suspect we will find that bank collateral in China is full of underwater collateral including stocks.

This is similar to medieval alchemists seeking to transform base metals into precious metals.

Accounting, finance, lax laws and regulations, and unethical/dishonest bankers, permit the creation of capital out of, in this case, thin air. A bank is mainly funded with deposit (risk-free in the US as they are FDIC insured to $250,000) liabilities, a bit of subordinated debentures/notes, and 4% to 8% stockholders' equity. In this example, bank insiders lend depositors' funds to individuals who convert the deposit liability in a couple of spins through the balance sheet into stockholders' equity. This is simple. Other schemes can be more complex. Maybe banks sell each other distressed loans, defaulted securities, foreclosed RE parcels, etc. at dishonestly high, "fairy-tale" values. They can materially misstate credit losses and camouflage seriously under-capitalized positions.

If the Germans are going to take over running Greece, for its own good of course, could the Japanese ....

No; unthinkable.

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