It is the ‘opinion of the European Central Bank’ that the deposit
protection scheme is no longer necessary:
‘covered deposits and claims under investor compensation schemes should
be replaced by limited discretionary exemptions to be granted by the
competent authority in order to retain a degree of flexibility.’
To translate the legalese jargon of the ECB bureaucrats this could mean
that the current €100,000 (£85,000) deposit level currently protected in the
event of a bail-in may soon be no more.
But worry not fellow savers as the ECB is fully aware of the uproar this
may cause so they have been kind enough to propose that:
“…during a transitional period, depositors should have access to an
appropriate amount of their covered deposits to cover the cost of living
within five working days of a request.”
So that’s a relief, you’ll only need to wait five days for some ‘competent
authority’ to deem what is an ‘appropriate amount’ of your own money for you
to have access to in order eat, pay bills and get to work.
The above has been taken from an ECB
paper published on 8 November 2017 entitled ‘on revisions to the
Union crisis management framework’.
It’s 58 pages long, the majority of which are proposed amendments to the
Union crisis management framework and the current text of the Capital
Requirements Directive (CRD).
It’s pretty boring reading but there are some key snippets which should be
raising a few alarms. It is evidence that once again a central bank can keep manipulating
situations well beyond the likes of monetary policy. It is also a lesson for
savers to diversify their assets in order to reduce their exposure to
counterparty risks.
Bail-ins, who are they for?
According to the May 2016 Financial Stability Review, the EU bail-in tool
is ‘welcome’ as it:
…contributes to reducing the burden on taxpayers when resolving large,
systemic financial institutions and mitigates some of the moral hazard
incentives associated with too-big-to-fail institutions.
As we have discussed in the past, we’re confused by the apparent
separation between ‘taxpayer’ and those who have put their hard-earned cash
into the bank. After all, are they not taxpayers?
This doesn’t matter, believes Matthew C.Klein in the FT who
recently argued:
Bail-ins are theoretically preferable because they preserve market
discipline without causing undue harm to innocent
people.
Ultimately bail-ins are so central banks can keep their merry game of easy
money and irresponsibility going. They have been sanctioned because rather
than fix and learn from the mess of the bailouts nearly a decade ago, they
have just decided to find an even bigger band-aid to patch up the system.
‘Bailouts, by contrast, are unfair and inefficient. Governments tend
to do them, however, out of misplaced concern about “preserving the system”.
This stokes (justified) resentment that elites care about protecting their
friends more than they care about helping regular people.’ Matthew C. Klein
But what about the regular people who have placed their money in the bank,
believing they’re safe from another financial crisis? Are they not ‘innocent’
and deserving of protection?
When Klein wrote his latest on bail-ins, it was just over a week before
the release of this latest ECB paper. With fairness to Klein at the time of
his writing depositors with less than €100,000 in the bank were protected
under the terms of the ECB covered deposit rules.
This still seemed absurd to us who thought it questionable that anyone’s
money in the bank could suddenly be sanctioned for use to prop up an ailing
institution. We have regularly pointed out that just because there is
currently a protected level at which deposits will not be pilfered, this
could change at any minute.
The latest proposed amendments suggest this is about to happen.
Why change the bail-in rules?
The ECB’s 58-page amendment proposal is tough going but it is about
halfway through when you come across the suggestion that ‘covered
deposits’ no longer need to be protected. This is determined
because the ECB is concerned about a run on the failing bank:
If the failure of a bank appears to be imminent, a substantial number
of covered depositors might still withdraw their funds immediately in order
to ensure uninterrupted access or because they have no faith in the guarantee
scheme.
This could be particularly damning for big banks and cause a further
crisis of confidence in the system:
Such a scenario is particularly likely for large banks, where the
sheer amount of covered deposits might erode confidence in the capacity of
the deposit guarantee scheme. In such a scenario, if the scope of the
moratorium power does not include covered deposits, the moratorium might
alert covered depositors of the strong possibility that the institution has a
failing or likely to fail assessment.
Therefore, argue the ECB the current moratorium that protects deposits
could be ‘counterproductive’. (For the banks, obviously, not for the people
whose money it really is:
The moratorium would therefore be counterproductive, causing a bank
run instead of preventing it. Such an outcome could be detrimental to the
bank’s orderly resolution, which could ultimately cause severe harm to
creditors and significantly strain the deposit guarantee scheme. In addition,
such an exemption could lead to a worse treatment for depositor funded banks,
as the exemption needs to be factored in when determining the seriousness of
the liquidity situation of the bank. Finally, any potential technical
impediments may require further assessment.
The ECB instead proposes that ‘certain safeguards’ be put in place to
allow restricted access to deposits…for no more than five working days. But
let’s see how long that lasts for.
Therefore, an exception for covered depositors from the application of
the moratorium would cast serious doubts on the overall usefulness of the
tool. Instead of mandating a general exemption, the BRRD should instead
include certain safeguards to protect the rights of depositors, such as clear
communication on when access will be regained and a restriction of the
suspension to a maximum of five working days by avoiding a cumulative use by
the competent authority and the resolution authority.
Even after a year of studying and reading bail-ins I am still horrified
that something like this is deemed to be preferable and fairer to other
solutions, namely fixing the banking system. The bureaucrats running the EU
and ECB are still blind to the pain such proposals can cause and have caused.
Look to Italy for damage prevention
At the beginning of the month, we explained how the banking
meltdown in Veneto Italy destroyed 200,000 savers and 40,000 businesses.
In that same article, we outlined how exposed Italians were to the banking
system. Over €31 billion of sub-retail bonds have been sold to everyday
savers, investors, and pensioners. It is these bonds that will be sucked into
the sinkhole each time a bank goes under.
A 2015 IMF study found that the majority of Italy’s 15 largest banks
a bank rescue would ‘imply bail-in of retail investors of subordinated debt’.
Only two-thirds of potential bail-ins would affect senior bond-holders, i.e.
those who are most likely to be institutional investors rather than
pensioners with limited funds.
Why is this the case? As we have previously explained:
Bondholders are seen as creditors. The same type of creditor that EU
rules state must take responsibility for a bank’s financial failure, rather
than the taxpayer. This is a bail-in scenario.
In a bail-in scenario the type of junior bonds held by the retail
investors in the street is the first to take the hit. When the world’s oldest
bank Monte dei Paschi di Siena collapsed ordinary people (who also
happen to be taxpayers) owned €5 billion ($5.5 billion) of subordinated debt.
It vanished.
Despite the biggest bail-in in history occurring within the EU, few people
have paid attention and protested against such measures. A bail-in is not
unique to Italy, it is possible for all those living and banking within the
EU.
Yet, so few protests. We’re not talking about protesting on the streets,
we’re talking about protesting where it hurts – with your money.
Read well, protest loudly and trust what you know and not just
what you are told.
As we have seen from the EU’s response to Brexit and Catalonia, officials
could not give two hoots about the grievances of its citizens. So when it
comes to banking there is little point in expressing disgust in the same way.
Instead, investors must take stock and assess the best way for them to
protect their savings from the tyranny of central bank policy.
To refresh your memory, the ECB is proposing that in the event of a
bail-in it will give you an allowance from your own savings. An allowance it
will control:
“…during a transitional period, depositors should have access to an
appropriate amount of their covered deposits to cover the cost of living
within five working days of a request.”
Savers should be looking for means in which they can keep their money
within instant reach and their reach only. At this point physical, allocated
and segregated gold and silver comes to mind.
This gives you outright legal ownership. There are no counterparties who
can claim it is legally theirs (unlike with cash in the bank) or legislation
that rules they get first dibs on it.
Gold and silver are the financial insurance against bail-ins, political
mismanagement, and overreaching government bodies. As each year goes by it
becomes more pertinent than ever to protect yourself from such risks.
Related content
Invest
In Gold To Defend Against Bail-ins
Precious
Metals Are “Best Defence” Against Bail-ins In Economic Crisis
Bail-Ins
Coming To Italy? World’s Oldest Bank “Survival Rests On Savers”
News and Commentary
Gold Prices (LBMA AM)
14 Nov: USD 1,273.70, GBP 972.47 & EUR 1,086.59 per ounce
13 Nov: USD 1,278.40, GBP 977.59 & EUR 1,097.89 per ounce
10 Nov: USD 1,284.45, GBP 976.44 & EUR 1,102.19 per ounce
09 Nov: USD 1,284.00, GBP 980.98 & EUR 1,106.29 per ounce
08 Nov: USD 1,282.25, GBP 976.82 & EUR 1,105.43 per ounce
07 Nov: USD 1,276.35, GBP 970.92 & EUR 1,103.28 per ounce
06 Nov: USD 1,271.60, GBP 969.72 & EUR 1,095.61 per ounce
Silver Prices (LBMA)
14 Nov: USD 16.94, GBP 12.92 & EUR 14.45 per ounce
13 Nov: USD 16.93, GBP 12.93 & EUR 14.53 per ounce
10 Nov: USD 17.00, GBP 12.92 & EUR 14.60 per ounce
09 Nov: USD 17.10, GBP 13.03 & EUR 14.69 per ounce
08 Nov: USD 17.00, GBP 12.96 & EUR 14.65 per ounce
07 Nov: USD 17.01, GBP 12.95 & EUR 14.70 per ounce
06 Nov: USD 16.92, GBP 12.90 & EUR 14.59 per ounce
