Bank bail-ins pose risks to retail investors and especially savers throughout the western world. The new bail-in rules have been made operational since the beginning of this year in the EU and in many other countries, yet the risks and ramifications of bail ins have been largely ignored in most of the media.

The Financial Times covers bail-ins today with a focus on the risk to investors while continuing to ignore that posed to savers and depositors including small and medium size enterprises.

From the FT:

When Ignazio Visco, governor of the Bank of Italy, spoke in Florence this month, his focus turned to regulation of bail-ins.

At a sensitive moment for Italian lenders, whose shares had collapsed over recent months, the governor chose to address what he called “regulatory uncertainty” in the wake of new European wide rules for failing banks.

“We must strike the right balance,” he said. “We should not rule out the possibility of temporary public support in the event of systemic bank crises, when the use of a bail­in is not sufficient.”

Taxpayer support for banks, however, was precisely what the new European rules introduced at the start of this year aimed to avoid. To protect taxpayers, investors in bank bonds – mostly untouched during the bailouts of the last crisis – now face losses, or “bail­ins”.


In a March paper, German academics warned of potential retail holdings of “subordinated debt”. The paper argued that existing EU regulation “insufficiently addresses mis-selling of bail-in instruments” and pushed for more clarity on exactly who holds the affected debt.

“Bail-in theoretically is a very nice concept but the legal issues are really very big,” says Martin R Götz, professor at Goethe university Frankfurt and a co-author of the paper. “It’s very important to sort these things out because subordinated debt holders, if they are retail investors, are voters.”

Sorting out the process will involve the familiar interplay between national authorities and European rulemakers intent on harmonising rules.

Alex Birry, a senior director at Standard & Poor’s, the rating agency, says “national conduct authorities need to continue to look closely at how these instruments are sold to retail investors”.

“Will there be tensions between what domestic politicians sometimes want to do and what European regulations allow?” asks Mr Birry. “Yes. That’s probably a price to pay if you want to have a banking union.”

See FT article here

A banking union in the EU is wonderful in concept but in practice is fraught with difficulties and risk. The use of bail-ins and the confiscation of deposits while protecting some tax payers in the short term, will likely destroy consumer and business confidence in the already fragile Eurozone economies and severely impact on the tax take in EU economies in the aftermath of the bail-ins and ensuing recessions or depressions.

Small and medium size businesses are the back bone of European and global economies. The confiscation of their corporate deposits, the very capital they use to fund growth – including servicing debt, paying rent and mortgages, employing staff and paying wages – would be highly deflationary and would push economies over the edge and into sharp recessions and lead to contagion in the Eurozone.

Bank bail-ins remain one of the greatest, but most poorly analysed and understood threats to depositors and savers today. The law of unintended consequences …

Read Protecting your Savings In The Coming Bail-In Era (11 pages)
Read From Bail-Outs to Bail-Ins: Risks and Ramifications (51 pages)

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