Bail-in At Your Local Bank – Part 4: Your Last Chance To Act
Series: Bail-in At Your Local Bank
With no fanfare and little to no media coverage, your government has just put in place a mechanism to use your deposit money to bail-in a failing bank, like what happened in Cyprus a short time ago.
The derivatives market, the trigger of the 2008 global financial crisis, has since gotten even bigger and more concentrated into fewer hands. A mutually assured destruction awaits the global economy next time it goes off again.
Herded along by the Financial Stability Board, governments of leading economies endorsed a framework during the past G20 Summit whereby depositors’ money will be used to rescue a failing bank when the global derivatives casino blows up again next time.
G20 governments are quietly slipping bail-in provisions into law to make sure that next time a too big to fail bank blows up again by derivatives it will be rescued using depositors’ money, in the name of protecting the taxpayers.
Financial derivatives are financial contracts in which the promised payoffs are derived from the performance of another underlying entity. The underlying entity can be an equity (such as an individual stock or a stock index), interest rate, credit or c …
In Part 3 of the series we examined how during the latest G20 Summit in Brisbane an agreement was put in place to institutionalize the concept of bail-in where, in the event a bank blows up, innocent depositors get creamed while the gambling bankers walk away scot-free. We also argued that the piddly amounts of regulatory based deposit insurance would be woefully insufficient in covering the depositors should a bank laced with toxic derivatives blows up.
Don’t think Cyprus is an isolated and one-off incident. The trial run was so successful that every government, or shepherd, is putting into place regulations for their sheep.
In Canada where the banks, at least on the surface, escaped the 2008 banking crisis unscathed, the Conservative government tabled a bail-in regime early in March, 2013 – prior to Cyprus, in fact – in its Economic Action Plan 2013 which outlined the scheme for the country (pages 144/145):
Canada’s large banks are a source of strength for the Canadian economy. Our large banks have become increasingly successful in international markets, creating jobs at home.
The Government also recognizes the need to manage the risks associated with systemically important banks — those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.
How can it be done without using taxpayer funds?
The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
So if banks make wild bets with your money, lose and become insolvent, “certain bank liabilities”, i.e. your deposit money, will be converted into regulatory capital.
Way over in Down Under where there is a collective $22 trillion in off-balance sheet derivatives exposure among the banks , the Aussie government alluded, in its Australian Government Budget 2013-2014, to a ‘prudential framework’ in line with the global initiatives overseen by Financial Stability Board whose bail-in mechanism was detailed in Part 2.
Per the Australian Prudential Regulation Authority section of the budget (p.134)
[ In 2013-14, APRA’s main strategic objectives are to ] consolidate the prudential framework by enhancing prudential standards where appropriate, in line with the global reform initiatives endorsed by the G20 and overseen by the Financial Stability Board;
Yup, the same FSB.
And over in the UK, as per the Telegraph:
(Greg Clark, UK financial secretary to the Treasury):
“The agreement represents a big success for the UK.”
Under the deal, after 2018 bank shareholders will be first in line for assuming the losses of a failed bank before bondholders and certain large depositors. Insured deposits under £85,000 (€100,000) are exempt and, with specific exemptions, uninsured deposits of individuals and small companies are given preferred status in the bail-in pecking order for taking losses.
And finally, the confiscation scheme in the US is well explained by lawyer and Public Banking Institute founder Ellen Brown’s It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors.
How would the governments react?
Here are a set of factoids for you to guess the likely outcome.
- The governments state that they no longer wish to use taxpayers’ money to bail out the next failing banks. Fair enough.
- The banking industry claims that deposit amounts covered by deposit insurance are guaranteed and safe (another way of saying amounts over the limit are not safe)
- The deposit insurance pools are tiny compared to the total insured amounts. And that’s before derivatives exposures among banks are taken into account. When the insurance pool runs out as it certainly will in a major blowup like last time, who backstops the insurance? The government? With taxpayers’ money?
The truth is nobody, including the governments, would know what to do in that situation. Most likely there will be a combination of taxpayers sponsored bail-out and depositors sponsored bail-in (including secured deposits). Depending the situation on the ground, which bank(s) are failing, the amounts involved and which industries and countries are impacted among other factors, the government would likely ‘wing it’ and come up with a haircut formula on the fly.
What Should You Do?
Other than pulling money from these too big to fail banks (which is a prudent thing to do regardless anyways) or cashing out your savings and hide it under a mattress, one thing citizens in a democracy can and should do is to hold our elected officials to account. After all, they are elected by the people and for the people, even though it might sound like a fairy tale which happened a long time ago in a faraway land.
A few questions should be raised to the politicians and clear and concise responses instead of content free and motherhood responses demanded, starting with the most obvious ones:
- What the f*ck are you planning to do with my money with these bail-in provisions?
- Why is my deposit not segregated from the banks’ casino money?
- If my money is being using to bail-in a failing bank, what are you doing to reign in the banks from these derivative bets?
In addition, spending some time to get yourself educated on the subject would help cut through the obfuscation and see through anyone who tries to baffle you with bullsh*t.
And last but not least, spread the words and tell everyone you know. Nothing cleanses like sunlight.
Bail-in At Your Local Bank series guide
- Part 1: The Stage Is Set – a look at the bail-in trial run in Cyprus and the mechanism the G20 governments are putting in place.
- Part 2: The Derivatives Time Bomb – how the trigger of the last financial crisis has gotten even bigger.
- Part 3: Institutionalizing the Money Grab – governments endorsed a framework during the past G20 Summit whereby depositors’ money will be used to rescue a failing bank when the global derivatives casino blows up again next time.
- Part 4: You Last Chance to Act – examines the provisions your government is putting in place, and what you should do.
- Primer on Derivatives – a quick primer on what derivatives are and the difference between notional and net.
- Australian Banks Demand Protection From Derivatives Losses Under Bail-In Plan
- The Confiscation Scheme Planned for US and UK Depositors
Image from thelastgreatstand.com