The Difference is, American Banks Allowed to Fail

LONDON (MarketWatch) -- Who says the regulatory arbitrage game isn't alive and well?

On the surface, the American and British programs on bank capitalization look pretty similar, but key differences are apparent.

In both cases, governments are issuing preferred stock. Sure, the terms are different -- taking on the Brit preferred incurs a steep 12%-a-year payout; Uncle Sam wants 5% a year, unless the holding is still on the books after five years.

In both the U.S. and the U.K., banks will face limitations on paying dividends -- American institutions won't be able to increase them; U.K. ones can't have them at all -- and both have executive pay guidelines.

But the real difference is to who it applies. In the U.K., the basic system was, get your capital up to certain thresholds privately -- or take the government money, and strings, to get there. HSBC Holdings (HBC 74.34, +0.09, +0.1%) and Barclays PLC (BCS 17.60, +1.85, +11.8%) were able to go down the private route, while Royal Bank of Scotland (RBS 1.20, -0.73, -37.8%) and Lloyds TSB (LYG 10.75, -1.42, -11.7%) were not. A quick check of the stock price shows the difference between taking private or public cash.

The U.S. one, by contrast, is voluntary. Other than the "big nine" that got roped into taking the cash, there seems to be a strong incentive for all but the most troubled lender to take a pass.

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Blocked Pipes- When banks find it hard to borrow, so do the rest of us

ANY good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink.

At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves.

Many banks have had to be rescued by rivals or the state. This week the Irish government felt compelled to guarantee the deposits and some other liabilities of the country’s six largest banks. Surviving banks have become ultra-cautious—“just taking things one day at a time,” says Matt King, a strategist at Citigroup.

The effect has been most dramatic in the overnight rate for borrowing dollars. Bank borrowing costs reached 6.88% on September 30th, more than three times the level of official American rates, while some were willing to pay a remarkable 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited a record €44 billion ($62 billion) with the ECB on September 30th even though they could have earned more than two extra percentage points by lending to other banks. It was the last day of the quarter and, for balance-sheet reasons, banks were particularly keen to have cash on hand. (Overnight rates fell back on October 1st, but one-month rates rose further, indicating that the crisis had not eased.)

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