In times of financial panic and market uncertainty governments are pushed to act, but with potential long-term negative consequences. The recent purchase of Bear Stearns by JP Morgan, and the Fed's takeover of the troubled mortgage providers Fannie Mae and Freddie Mac, involved the assumption of billions of dollars of possible bad debt obligations.
The Bank of England did the same with Northern Rock. The results have been public disquiet over ill thought-out government bailouts at the taxpayer's expense.
History repeats itself, and in the financial sector this seems to be happening with alarming regularity. Take the US savings and loans crises of the 1980s and 1990s.
More than 1,000 savings and loans institutions failed over that period, and the causes seem to be the same as those haunting the markets today. Greed, excessive risky lending, especially related to property, a lack of bank capital and a mismatch of assets and liabilities by financial institutions, coupled with outright fraud, were all primary contributors then and now.
Government bailouts do not come cheap. According to the US General Accounting Office, the initial mortgage related bailouts cost taxpayers about US$125 billion (Dh460bn).
This time, the ultimate cost could be significantly higher, as recent reports indicate that the subprime meltdown could end up wiping out nearly US$1 trillion of bank assets. Given this generous government safety net, the risk of repeating costly mistakes and going unpunished is always inherent in the system. Economists call this moral hazard.
Thankfully, there seems to be a way out, and the insurance industry provides a potential answer. Most of us have taken out one form of insurance or another to protect against unforeseen risks. Every year we pay the insurance companies a premium. If we are extremely careful, the following year's premium might be reduced or held the same.
If we are unlucky, we receive a payout, but unlike government bailouts this insurance payout is not free. We pay for this insurance.
Some will argue that government bailouts of distressed financial institutions are in a different league from personal insurance cover, as the potential damage to the overall economy and consumer confidence is substantially higher than the potential cost of government bailouts.
The argument, however, can be reversed. Given the enormity of potential financial distress spreading among banks and other institutions, why not require them to purchase "bailout" insurance? The same common sense principle applies to us: we cannot obtain mortgage finance unless we have a fire insurance policy in place. This is our "bailout".
Who would charge this insurance to the financial sector? Central banks can be the actual or explicit insurers, as they are the implicit bailout insurers. Instead of becoming last-resort lenders, central banks might also become the insurers of first resort and force financial institutions to think twice before engaging in risky financial activities.
As individuals, we are advised that insurance will not be provided if we engage in risky activities. Similarly, why not have such a warning sign for financial institutions? If some huge banks are "too big to fail", why not make the implicit government insurance explicit and charge them a premium?
Central banks would then require member banks to purchase insurance, at a price the central bank would set, and adjust this premium periodically based on an evaluation of the level of risk in a financial institution's holdings.
Some might also argue that this would be an imperfect system, as insurance works best when insurers cover a large number of clients for events that are either highly unlikely, catastrophic or essentially unrelated to each other.
Despite some defects to the proposed insurance bailout system, there are benefits for its adoption. A central bank insurance bailout fund would be invested for the benefit of the insured "pool" of banks. In case of bailout payments, the fund would act as a reserve, instead of a 100 per cent taxpayer bailout. Also, the relative premium paid by the insured members would be public information, and act as a strong signalling mechanism to the marketplace regarding how a central bank perceives the level of risk for each financial institution.
The raising of bailout insurance premiums would have negative consequences on a financial institution, and make it think twice before engaging in risky activities. Some institutions might not wish to make voluntary bailout insurance premiums to the central bank. Again, this action would be signalled to the market, causing other parties to hesitate before dealing with the non-contributing institutions.
Implementing such a scheme would not be easy, because it would require an army of central bank risk assessors identifying risks that are disguised from auditors and the public. Some will argue that the financial system performs best when it is less regulated and innovative. Investment banks have prided themselves on their ability to manage risks and returns. The global regulatory framework was premised on that ability, but it has failed badly. Financial institutions did manage risks, but in a way that left them seemingly the winners, and wider society, including those repossessed of their homes, the losers.
In such an environment, a signalling mechanism based on bailout insurance premiums might be a useful regulatory signalling tool to reduce the likelihood of future government bailouts.
Dr Mohamed Ramady is a former banker and a visiting associate professor of finance and economics department at King Fahd University of Petroleum and Minerals in Saudi Arabia
business@thenational.ae
Wicked
Director: Jon M Chu
Stars: Cynthia Erivo, Ariana Grande, Jonathan Bailey
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The Buckingham Murders
Starring: Kareena Kapoor Khan, Ash Tandon, Prabhleen Sandhu
Director: Hansal Mehta
Rating: 4 / 5
COMPANY%20PROFILE
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Electoral College Victory
Trump has so far secured 295 Electoral College votes, according to the Associated Press, exceeding the 270 needed to win. Only Nevada and Arizona remain to be called, and both swing states are leaning Republican. Trump swept all five remaining swing states, North Carolina, Georgia, Pennsylvania, Michigan and Wisconsin, sealing his path to victory and giving him a strong mandate.
Popular Vote Tally
The count is ongoing, but Trump currently leads with nearly 51 per cent of the popular vote to Harris’s 47.6 per cent. Trump has over 72.2 million votes, while Harris trails with approximately 67.4 million.
If you go
Where to stay: Courtyard by Marriott Titusville Kennedy Space Centre has unparalleled views of the Indian River. Alligators can be spotted from hotel room balconies, as can several rocket launch sites. The hotel also boasts cool space-themed decor.
When to go: Florida is best experienced during the winter months, from November to May, before the humidity kicks in.
How to get there: Emirates currently flies from Dubai to Orlando five times a week.
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Nayanthara: Beyond The Fairy Tale
Starring: Nayanthara, Vignesh Shivan, Radhika Sarathkumar, Nagarjuna Akkineni
Director: Amith Krishnan
Rating: 3.5/5
The specs
Engine: 3.9-litre twin-turbo V8
Power: 620hp from 5,750-7,500rpm
Torque: 760Nm from 3,000-5,750rpm
Transmission: Eight-speed dual-clutch auto
On sale: Now
Price: From Dh1.05 million ($286,000)
Living in...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
Women’s T20 World Cup Asia Qualifier
ICC Academy, November 22-28
UAE fixtures
Nov 22, v Malaysia
Nov 23, v Hong Kong
Nov 25, v Bhutan
Nov 26, v Kuwait
Nov 28, v Nepal
ICC T20I rankings
14. Nepal
17. UAE
25. Hong Kong
34. Kuwait
35. Malaysia
44. Bhutan
UAE squad
Chaya Mughal (captain), Natasha Cherriath, Samaira Dharnidharka, Kavisha Egodage, Mahika Gaur, Priyanjali Jain, Suraksha Kotte, Vaishnave Mahesh, Judit Peter, Esha Rohit, Theertha Satish, Chamani Seneviratne, Khushi Sharma, Subha Venkataraman
Company%20Profile
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The biog
Alwyn Stephen says much of his success is a result of taking an educated chance on business decisions.
His advice to anyone starting out in business is to have no fear as life is about taking on challenges.
“If you have the ambition and dream of something, follow that dream, be positive, determined and set goals.
"Nothing and no-one can stop you from succeeding with the right work application, and a little bit of luck along the way.”
Mr Stephen sells his luxury fragrances at selected perfumeries around the UAE, including the House of Niche Boutique in Al Seef.
He relaxes by spending time with his family at home, and enjoying his wife’s India cooking.
Your Guide to the Home
- Level 1 has a valet service if you choose not to park in the basement level. This level houses all the kitchenware, including covetable brand French Bull, along with a wide array of outdoor furnishings, lamps and lighting solutions, textiles like curtains, towels, cushions and bedding, and plenty of other home accessories.
- Level 2 features curated inspiration zones and solutions for bedrooms, living rooms and dining spaces. This is also where you’d go to customise your sofas and beds, and pick and choose from more than a dozen mattress options.
- Level 3 features The Home’s “man cave” set-up and a display of industrial and rustic furnishings. This level also has a mother’s room, a play area for children with staff to watch over the kids, furniture for nurseries and children’s rooms, and the store’s design studio.
If you go
The flights
There are direct flights from Dubai to Sofia with FlyDubai (www.flydubai.com) and Wizz Air (www.wizzair.com), from Dh1,164 and Dh822 return including taxes, respectively.
The trip
Plovdiv is 150km from Sofia, with an hourly bus service taking around 2 hours and costing $16 (Dh58). The Rhodopes can be reached from Sofia in between 2-4hours.
The trip was organised by Bulguides (www.bulguides.com), which organises guided trips throughout Bulgaria. Guiding, accommodation, food and transfers from Plovdiv to the mountains and back costs around 170 USD for a four-day, three-night trip.
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
Citadel: Honey Bunny first episode
Directors: Raj & DK
Stars: Varun Dhawan, Samantha Ruth Prabhu, Kashvi Majmundar, Kay Kay Menon
Rating: 4/5
APPLE IPAD MINI (A17 PRO)
Display: 21cm Liquid Retina Display, 2266 x 1488, 326ppi, 500 nits
Chip: Apple A17 Pro, 6-core CPU, 5-core GPU, 16-core Neural Engine
Storage: 128/256/512GB
Main camera: 12MP wide, f/1.8, digital zoom up to 5x, Smart HDR 4
Front camera: 12MP ultra-wide, f/2.4, Smart HDR 4, full-HD @ 25/30/60fps
Biometrics: Touch ID, Face ID
Colours: Blue, purple, space grey, starlight
In the box: iPad mini, USB-C cable, 20W USB-C power adapter
Price: From Dh2,099
UAE currency: the story behind the money in your pockets
Traits of Chinese zodiac animals
Tiger:independent, successful, volatile
Rat:witty, creative, charming
Ox:diligent, perseverent, conservative
Rabbit:gracious, considerate, sensitive
Dragon:prosperous, brave, rash
Snake:calm, thoughtful, stubborn
Horse:faithful, energetic, carefree
Sheep:easy-going, peacemaker, curious
Monkey:family-orientated, clever, playful
Rooster:honest, confident, pompous
Dog:loyal, kind, perfectionist
Boar:loving, tolerant, indulgent
Formula One top 10 drivers' standings after Japan
1. Lewis Hamilton, Mercedes 306
2. Sebastian Vettel, Ferrari 247
3. Valtteri Bottas, Mercedes 234
4. Daniel Ricciardo, Red Bull 192
5. Kimi Raikkonen, Ferrari 148
6. Max Verstappen, Red Bull 111
7. Sergio Perez, Force India 82
8. Esteban Ocon, Force India 65
9. Carlos Sainz Jr, Toro Rosso 48
10. Nico Hulkenberg, Renault 34
Business Insights
- As per the document, there are six filing options, including choosing to report on a realisation basis and transitional rules for pre-tax period gains or losses.
- SMEs with revenue below Dh3 million per annum can opt for transitional relief until 2026, treating them as having no taxable income.
- Larger entities have specific provisions for asset and liability movements, business restructuring, and handling foreign permanent establishments.
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UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
The biog
Name: Greg Heinricks
From: Alberta, western Canada
Record fish: 56kg sailfish
Member of: International Game Fish Association
Company: Arabian Divers and Sportfishing Charters
UAE currency: the story behind the money in your pockets
Killing of Qassem Suleimani