Bail-In, Coming to a bank near you?

- March 08, 2016 -

Following similar steps already taken in United.States the European Commission recently ordered 11 members of the European Union (EU) to enact the Bank Recovery and Resolution Directive (BRRD). These rules theoretically aim to shield taxpayers from the fall out of another banking crisis similar to the recent fiascoes in Cyprus and Greece. The BRRD mandates that if a future banking crisis develops governments will not be obligated to prop up the banks. At any rate most countries are so far in debt that they would not have sufficient assets to bail out even a small regional bank. Instead the burden will be put on creditors and depositors to bail-in their troubled bank. In simple terms legislating bank bail-ins aims to remove government responsibility when a bank fails. This news was not covered by a vast majority of mainstream media outlets despite the serious risks and ramifications for depositors and savers in the United States, throughout the EU, and internationally (i.e. Canada, New Zealand, et al).

Bank bail-ins, what you don’t know can hurt you

There’s something really important to note here. Most individuals do not recognize that when one opens a bank account they become an ‘unsecured creditor’ of the bank. Most often this fact is lost in the fine print of the agreement individuals sign when opening a bank account. Under the template of ‘bail-in’ legislation unsecured creditors of a bank will be the first ones whose deposits will be used (a.k.a. stolen) to prop up a failing bank. In the case of Cyprus, unsecured creditors lost virtually 100% of their deposits over €100,000 Euros. As most can envision, seniors who were responsible and saved throughout their lives for retirement, were in particular really hit hard by this.

Could it happen in the United States? You can bank on it!

In 2012 the United States’ Federal Deposit Insurance Corporation (FDIC) and the Bank of England co-wrote a paper on how their government’s should address failing banks. The following passage is from the Executive Overview:

“The financial crisis that began in 2007 has driven home the importance of an orderly resolution process for globally active, systemically important, financial institutions (G-SIFIs)… These strategies have been designed to enable large and complex cross-border firms to be resolved without threatening financial stability and without putting public funds at risk…

In the U.S., the strategy has been developed in the context of the powers provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Such a strategy would apply a single receivership at the top-tier holding company, assign losses to shareholders and unsecured creditors of the holding company, and transfer sound operating subsidiaries to a new solvent entity or entities.”

In simple term the United States followed the same template that its European brethren are now using.

Are you vulnerable?

Like the United States, each country in the EU will enact its own version of this ‘bail-in’ legislation. How vulnerable savers are in a specific country is difficult to tell at this time. However, the worldwide drive towards a cashless economy which has accelerated of late makes deposit holders and savers ever more vulnerable. Allowing for the confiscation of deposits is a retrograde step and may be the last straw for a western banking system already on life support courtesy of central banks. Central banks claim to be averting deflation and recession with quantitative easing (QE) and negative interest rates, not simply bailing out or aiding overly stressed banks. However, recent economic data suggests otherwise.

The Bank’s interest above yours

To reiterate, the current United States/EU legislated bail-in of deposits would again place the interest of banks over those of depositors and savers. Cyprus was devastated by bail-ins and shows little sign of recovery. However, the key lesson from Cyprus and the coming shift from bail-out to bail-in legislation is that a precedent has now been established in terms of deposit confiscation. Therefore, simply having ‘insured’ deposits in a bank can no longer be considered the safest way to save and protect one’s assets. Conservative wealth management, wealth preservation along with asset diversification should be the critical concerns as it pertains to your portfolio. Gold and Silver can play an important role protecting, preserving and potentially increasing your wealth in the face of the coming bail-in era.