We know that Gringotts Wizarding Bank is the sole bank for witches and wizards in all of the United Kingdom. This makes it too big to fail. Though economics is not taught at Hogwarts School of Witchcraft and Wizardry, the magical world follows many of the same laws of economics as the muggle one. As muggles found out in 2008, if a too-big-to-fail institution is threatened with collapse, it can harm the economy beyond the financial sector. We look at one of the simplest policy proposals in regards to the problem of Gringotts size. Namely, what happens to financial stability if we split it up to make multiple smaller institutions?
To analyze this question we calibrate and simulate the wizarding economy. Due to the literature on the Wizarding World, we are able to find an official exchange rate of roughly £5/Galleon. But official exchange rates determined by the government do not tell the full story. In terms of purchasing power (comparing costs of newspapers), the more accurate exchange rate should be £376.90/Galleon (roughly $493/Galleon at August exchange rates). Then comparing the cost of Hogwarts to the price of other elite British boarding schools we are able to deduce a “true” tuition cost of roughly £2,500,000/year or $3,700,000/year (paid by the Ministry of Magic). Ultimately this leads to a GDP per capita in Wizarding UK of approximately $8,400,000, significantly higher than the $55,836 in the United States.
With these numbers, we found that breaking up Gringotts would be devastating during a financial crisis. By splitting it up the banks would require an external bail-out rather than the implicit bail-in that the single institution provides. The costs of a crisis would be 10%-50% of GDP more expensive after splitting up Gringotts depending on the stress scenario (for instance rumors of Lord Voldemort’s return or the threat of muggles discovering the Wizarding World). We note that this ignores the possibility that the split up institutions change strategies after they lose the too-big-to-fail designation and can no longer rely on a bail-out to save them.
That is, unless the goblins at Gringotts have an infinite supply of Felix Felicis to avoid any market downturn.
Behind the stories of dragons, white walkers, and warfare, there is a story of risky investments in HBO’s hit series Game of Thrones. And the economics of these investments tell much of the story of what has occurred in King’s Landing. This policy proposal is for Cersei Lannister to strengthen the Seven Kingdoms, but also strengthen the position of the Lannister family. We propose a three pronged strategy:
Additionally, though the Lannister family has seemingly inexhaustible gold reserves (cf. Season 1 Episode 5), as with any resource — even in Westeros — there is a finite supply. Tywin Lannister said as much (Season 4 Episode 5): “Our last working mine dried up three years ago.” On top of this the Lannisters have lent large sums of gold to the Iron Throne (cf. Season 1 Episode 3). As the Lannisters are not able to pay off the loans called in by the the Iron Bank of Braavos (Season 5 Episode 4), we can rightfully assume that the loans the Lannisters have made to the Iron Throne constitute a large fraction of their wealth — an estimated $1.8 Billion in 2013.
Recognizing that repaying the loans due to the Iron Bank is not tenable and thus a threat to the safety of Cersei Lannister and her house, she dispatched Mace Tyrell to renegotiate (Season 5 Episode 4). On top of that, she received forgiveness of the debt the Iron Throne has with the Faith of the Seven, and in exchange she grants the Faith the right to create its own military once more — the Faith Militant.
Given the financial situation of the Lannister family and the Iron Throne, we propose a three part strategy that helps King Tommen and the entire Lannister family. First, the creation of a bond market for governmental debt. Second, the proposal to institute stricter financial regulation within Westeros. And third, the beginning of a propaganda campaign against money in politics.
Second, as discussed, the Lannisters have a significant portion of their family wealth invested in loans to the Iron Throne. In the terminology of modern banking, this is a single, undiversified and illiquid, portfolio. Such an investment would be considered unwise by financial analysts. It is undiversified because Tywin has placed all eggs in one basket. It is illiquid because the Iron Throne is not capable of paying the funds back in the near future. In order to diversify their investment, the Lannisters need to be able to exchange their future debt obligations (loan repayments) for Gold Dragons.
Third, as the Iron Bank of Braavos lent millions of Gold Dragons to the Iron Throne and it is said, “the Iron Bank will have its due.” Tywin Lannister acknowledged as much and more (Season 4 Episode 5): “If you owe [the Iron Bank] money, and you don’t want to crumble yourself, you pay it back.” In financial parlance, this is counterparty risk: the risk that the other participant in a contract (the Iron Throne) may not fulfill their obligations (because they must pay the Iron Bank of Braavos first). Following this logic the Iron Bank owns the senior tranche of debt (i.e., paid back first) and the Lannisters (and any other lender) owns a junior tranche. Owning the junior tranche means the Lannisters have a riskier investment than even they might suspect. (This is reminiscent of the Collateralized Debt Obligations [CDOs] that partially drove the 2008 financial crisis. Before 2008 investors were buying the junior tranches of mortgage backed securities, but not calculating their risk properly.) The creation of a bond market would allow for legal structure to be put in place so that various tranches could be bought — without unspoken prioritization of obligations.
As the Iron Bank of Braavos would not want to renegotiate their contracts, nor receive lower interest rates than they were previously winning, we propose a new policy of financial regulation. Since the Iron Bank is able to single-handedly finance a coup or war in order to change the rulers of a city or kingdom, its failure would surely be a cataclysmic event within Westeros and Essos. We would thus classify the Iron Bank as a systemically important financial institution [SIFI]. King Tommen should be advised of the risks that a failure at the Iron Bank would cause, and use his position of power to communicate this this throughout the Seven Kingdoms. Thus for them to continue to operate within Westeros they must begin paying taxes that could be used for a bailout in the case of financial panic or a bank run (i.e., everyone wishes to withdraw their money at once, which would push the Iron Bank into bankruptcy). Additional requirements could be enacted as well. As the Iron Bank of Braavos is much larger than other institutions that exist within the Seven Kingdoms, e.g., lending by the Faith of the Seven, the rules could be written as to be specific to the Iron Bank alone. Of course if the Faith of the Seven becomes too powerful they can be classified as a SIFI as well. Though having the debts of the crown to the Faith greatly reduces the size of the Faith as a financial institution.
Finally, the Iron Bank would surely turn against the Lannister family and King Tommen for implementing new financial regulation. This is where the third policy becomes important: winning the hearts and minds of the people. The smallfolk generally do not follow the going-ons at court, nor do they care who their king is (Season 1 Episode 4). However, the common people seemingly enjoy seeing the nobles brought to “justice” (cf. Season 5 Episode 10). And with the religious reawakening of the Sparrows along with a revived Faith Militant, surely rooting out usurers would be in the list of sins. Thus the Iron Bank of Braavos would be demonized for attempting to overthrow the King Tommen, and any noble fighting to take the Iron Throne would be seen as corrupted by money and unfit to rule by the High Septon and Sparrow. The smallfolk would follow as their suffering could be blamed on the financiers.