Suppose you have an insolvent bank. Assets 100, liabilities 90 - but 30 of the assets are not worth ANYTHING. Further suppose rates are zero to fund the bank, 3 percent to lend, 1 percent of costs - spread after costs of 2%. Costs are on total assets (100) at all times.''
The insolvent bank will have interest revenue of 2.1 (3 percent of 70). It will have funding costs of zero (0% of 90). It will have operating costs of 1 (by assumption).
Therefore it will make 1.1 in CASH PROFITS EACH YEAR.
By contrast presume rates are 10% to fund and 13 percent to lend - the same 3% spread.
Assume operating costs are the same.
The bank will have interest revenue of 9.1 (13 percent of 70). It will have funding costs of 9 (10% of 90). It will have operating costs of zero.
It will have - pre-credit losses - an OPERATING LOSS of 0.9 per year. The bank NEVER recapitalises.Remembering that Eurozone inflation has surpassed the European Central Bank's main refinancing rate of 1% by 40 to 50 basis points in the last 3 months - latest Eurostat figures (pdf) put Eurozone inflation in April at 1.5% this paints a black picture for a recovery a la Japan which was able to deflate for 2 decades.
Hempton writes the Brontecapital blog, which was temporarily taken down by Go ogle last January over a post headlined: "A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia."