Happy 2nd Birthday Bail-in Tool! We Suggest Gold As The Perfect Gift
– Two years since bail-in rules officially entered EU regulations
– EU bail-in rules have wiped out billions for savers and and businesses, with more at risk
– Future of many failing banks now rests on depositors who may no longer be protected by deposit insurance
– Physical gold enables savers to stay out of banking system and reduce exposure to bail-ins
– For more listen to our Goldnomics Podcast: What does 2018 have in store for financial markets?
Ah, New Year’s resolutions, what fun. For some reason we opt to commit to fairly big life changes at some point between Christmas and New Year. This is a time when the real world seems a lifetime away from the cosiness of the holiday season. We often make a resolution when we have had too much of something, perhaps booze, perhaps food or perhaps it is based on regrets from the previous year. Despite best intentions, rarely do we stick to them.
May we make a suggestion? If you’re going to make any resolutions this year make one that is pretty easy to stick to and that won’t make too much of a short-term impact on your life: resolve to pay attention to and to protect yourself from the threat that is ECB bail-in tools. In the long-term you’ll be more grateful you did this than if you had given up cursing or drinking for a month.
On the 1st January 2018 the ECB bail-in tool will be two years old. That’s right just over two years ago the ECB decided that it was better to force the financial burden of banks’ failures away from the state and instead onto bondholders and creditors i.e. those with money in the bank.
The ECB was following in the footsteps of the US where bail-ins have been part and parcel of financial legislation since the crisis of 2007-08. Canada has more recently joined the party.
We have relentlessly covered the threat of and developments in bail-in legislation over the last two years. It is perhaps the most shocking decision to come out of regulators and central banks since the financial crisis. It is even more shocking when one considers the lack of uproar from the financial media who continue to peddle the myth that the financial system is more secure than pre-financial crisis.
The bail-in legislation has been put in place because the EU, along with the rest of the world, has been through a horrendous financial crisis. It exposed such dangers in the banking system that it has taken nearly a decade for global regulators to agree to post-banking crisis rules. Just this month Basel III was agreed. The whole aim of the agreement is to protect governments by having private investors suffer losses first during banking crises.
One has to ask, if politicians are so keen for us to believe in the stability of the financial system in those problem areas why the need for legislation that not only places depositors at risk but has been updated continuously to put them at even more of a disadvantage?
2018 should be a time when investors and savers resolve to take charge of their wealth and hold it outside of the banking system. Physical gold that is allocated and segregated is able to offer this, as well as zero exposure to the bail-in regime. You can hear more about our expectations for 2018 in our new Goldnomics podcast.
What is a bail-in?
A quick refresher from our free guide to bail-ins:
A bail-in is when regulators or governments have statutory powers to restructure the liabilities of
distressed banks and nancial institutions, and impose losses on both bondholders and depositors.
Simply stated, a bank bail-in is an attempt to resolve and restructure a bank as a going concern, by creating additional bank capital (recapitalisation) via forced conversion of the bank’s creditors’ claims (potentially bonds and deposits) into newly created share capital (common shares of the bank).
This is really the crux of the Cyprus template – depositors internationally now have to think of their uninsured deposits as liable to potentially being con scated and transformed into bank shares.
Bank depositors have traditionally viewed their bank deposits as one hundred percent secure, with an inalienable right to have their deposits returned in full. However, this has never been the case in legal terms, as a bank depositor is just an unsecured creditor of the bank.
The original bail-in legislation stated that a bail-out using public funds was not an option until creditors accounting for at least 8% of the lender’s liabilities had paid up (the bail-in). At the moment €100,000 or £75,000 is protected per depositor, this amount is known as a ‘covered deposit’.
Deposits soon to be more exposed, as decided by bureaucrats
In terms of who pays what it is no longer down to the sovereign government, the introduction of bail-in legislation made clear that that responsibility now lies with the Single Resolution Mechanism.
So not only are your government unable to act in your best interests when it comes to a bail-in but you are now at the mercy of the ECB who will decide on a bail-in based on the Union’s best interests.
This was most recently reminded to us when the ECB proposed that ‘covered deposits’ should be replaced to allow for more flexibility. Essentially under the new proposals depositors and savers will no longer be guaranteed any amount of money should a bank go under.
“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