No banks are safe (bail ins, FDIC limits, systemic risks)

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In the introduction, the resolution informs readers that the FDIC and the Bank of England have been working together to formulate the new bail-in model for future bank failures:

The Federal Deposit Insurance Corporation (FDIC) and the Bank of England—together with the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, and the Financial Services Authority— have been working to develop resolution strategies for the failure of globally active, systemically important, financial institutions (SIFIs or G-SIFIs) with significant operations on both sides of the Atlantic.

The goal is to produce resolution strategies that could be implemented for the failure of one or more of the largest financial institutions with extensive activities in our respective jurisdictions. These resolution strategies should maintain systemically important operations and contain threats to financial stability. They should also assign losses to shareholders and unsecured creditors in the group, thereby avoiding the need for a bailout by taxpayers.

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The joint US/UK resolution states that depositor haircuts are already legal in the UK thanks to the 2009 UK Banking Act:

In the U.K., the strategy has been developed on the basis of the powers provided by the U.K. Banking Act 2009 and in anticipation of the further powers that will be provided by the European Union Recovery and Resolution Directive and the domestic reforms that implement the recommendations of the U.K. Independent Commission on Banking. Such a strategy would involve the bail-in (write-down or conversion) of creditors at the top of the group in order to restore the whole group to solvency.

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And that the legal authority has already been given in the US buried in Dodd-Frank:

It should be stressed that the application of such a strategy can be achieved only within a legislative framework that provides authorities with key resolution powers. The FSB Key Attributes have established a crucial framework for the implementation of an effective set of resolution powers and practices into national regimes. In the U.S., these powers had already become available under the Dodd-Frank Act. In the U.K., the additional powers needed to enhance the existing resolution framework established under the Banking Act 2009(the Banking Act) are expected to be fully provided by the European Commission’s proposals for a European Union Recovery and Resolution Directive (RRD) and through the domestic reforms that implement the recommendations of the U.K. Independent Commission on Banking (ICB), enhancing the existing resolution framework established under the Banking Act.

The development of effective resolution strategies is being carried out in anticipation of such legislation. The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, ...

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Resolving Globally Active, Systemically Important, Financial Institutions

A joint paper by the Federal Deposit Insurance Corporation and the Bank of England

10 December 2012
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DoChenRollingBearing said:

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Slow bank run... I have been doing that for quite a while now. I get money, I take money OUT of the bank. Some stays in CA$H, some goes to buying gold. Nothing that has happened this year changes my view.

Nor did anything that happened last year, or in 2011, 2010, 2009, 2008, 2007.....

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Jay said:

...I honestly don't have a single piece of gold...

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dontdeBasemebro said:

I am assuming that the aren't, but just to throw it out there...

Are credit unions any more secure than the regular banks?

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dontdeBasemebro said:

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Are credit unions any more secure than the regular banks?

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Normally, I wouldn't trust anything from thestreet.com but a few years ago they bought Weiss Ratings - a VERY reputable bank rating service and from what I understand they have not messed with it. You can screen your bank and also screen for high and low-rated banks in your area. The URL is here:

http://www.thestreet.com/bank-safety/index.html?src=ratingsindex&tab=3

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As is typically the case, Krugman gets part of the story correct, the sensational part (which helps explains his popularity). Everything else he says is generally rubbish.

Krugman is correct that Cyprus is going to be ugly. And he is sure to follow up with numerous "I told you so" articles when that happens.

This is where common sense stops and nonsense begins. Europe and the US do not suffer from lack of capital controls. The origin of this crisis is fractional reserve banking in and of itself.

The Krugman "solution" is more government controls, more taxation, more regulation, more manipulation, even to the point of actually advocating the "bad old days" when everyone had capital controls.

In addition to capital controls, Krugman advocates tariffs, advocates higher minimum wages, higher taxes, and more government spending.

Good grief!


Money flows to places like Cyprus, Luxembourg, and Spain "because of " inane Keynesian and Monetarist programs elsewhere.

Not once does Krugman ever stop and think that the very policies that he espouses are precisely what has caused the capital flight!

Rather than address the root problems, Krugman now wants capital controls on top of all the other foolish things he desires.

When does it stop Paul? When?

Read more at http://globaleconomicanalysis.blogs...n-to-panic-hot-money.html#RJvEUZR8M6UxoCGb.99

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And it’s not just Europe. In the last decade America, too, experienced a huge housing bubble fed by foreign money(sic!), followed by a nasty hangover after the bubble burst. The damage was mitigated by the fact that we borrowed(sic!) in our own currency, but it’s still our worst crisis since the 1930s.

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SWITZERLAND REVISES 1934 BANKING ACT TO ALLOW BAIL-IN DEPOSIT CONFISCATIONS!

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The Swiss Financial Market Supervisory Authority (FINMA) has quietly joined the growing parade of western nations who have quietly re-written banking laws to allow depositor bail-ins upon the next banking crisis.
If Switzerland, the once ultimate safe haven for banking deposits across the world is preparing to confiscate depositors funds, there truly is no protection anywhere other than physical gold and silver in your own possession!

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In the event that a bank is failing or where its capitalization is no longer adequate, the Swiss Financial Market Supervisory Authority (“FINMA”) may take measures to improve such bank’s financial viability rather than liquidating it. “Loss absorption” and “bail-in” are important instruments to support any such measures.

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In a speech titled "Regulating Large Financial Institutions" Stein [Fed governor Jeremy Stein] made something very clear: if and when a TBTF fails, and since this time is not different, and a failure is only a matter of time, depositors will lose everything (courtesy of some $300 trillion in gross unnetted liabilities which once there is a counterparty chain failure, suddenly become very much net and immediately marginable - a drain of cash), which now that Cyprus is the template, is to be expected. Not only that but Stein makes it all too clear that part of the Dodd-Frank resolution authority guidelines, a bailout is no longer an option.

Perhaps more to the point for TBTF, if a SIFI does fail I have little doubt that private investors will in fact bear the losses--even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.

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Deposits of over €100,000 are likely to be hit in the event of future European bank collapses, according to a proposal put forward by the Irish presidency of the European Council ahead of a key meeting of finance ministers next week.

Discussions on the controversial bank resolution regime, which is likely to see savers with deposits over €100,000 “bailed in” as part of future bank wind-downs, are due to intensify this week in Brussels, ahead of Tuesday’s meeting, which will be chaired by Minister for Finance, Michael Noonan.
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ancona said:

... Britain is considering sliding in some new bank regulations such as maximum allowable cash in any one transaction and maximum allowable withdraw at any one time or within a specific time period. ...

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ancona said:

Most of us here grew up believing that our money was simply sitting in the bank

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Deposits of over €100,000...

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DoChenRollingBearing said:

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Having some genuine FIAT$ / CA$H at home (or even tucked away in the Peru's of the world if you feel it is safe) is not a bad idea either.

As long as the bad guys don't show up...

:doodoo: :doodoo:

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PMBug said:

Well, let's summarize:

Don't leave too much of your money in the bank. Bail-ins are the new normal.

Don't leave too much of your money in custodial accounts at a brokerage. Wall Street can rob you blind without legal repercussion apparently (MF Global, et. al).

Don't leave too much of your money in bubble markets (equities, bonds, real estate). High risk pending central banker whims.

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A portion of the $2.6 trillion money market fund industry would be required to fundamentally change how it prices its shares under proposals issued by U.S. regulators on Wednesday to reduce the risk of abrupt withdrawals.

But the Securities and Exchange Commission plan was not as strict as some market players feared and included an industry-favored provision for funds to charge withdrawal fees and delay return of funds to customers during times of financial distress.

For more than a year the SEC has been debating whether changes made in 2010 were enough to avoid a repeat of a run on money market funds seen at the height of the financial crisis.

The additional reforms proposed on Wednesday did not go as far as a draft proposal floated last year by then-SEC Chair Mary Schapiro, who left in December.

The fund industry had warned that further major reforms could kill investor interest in money market funds.

In a compromise move, the SEC's new plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs because those investors are more sophisticated and more likely to pull large blocks of money first in a panic.

The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets.

The SEC's plan calls for two alternative proposals that it said could be adopted alone or in combination.

The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value (NAV).

That reform is a direct response to what happened in 2008 when the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck."

That ignited a run by investors across the money fund industry, cutting off a major source of overnight funding for many corporations.

The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.

Government funds would be limited to Treasuries, but the SEC said that most funds featuring tax-exempt debt sold by state and local governments would qualify as retail funds.

The industry has long fought against moving away from a stable share price, which it says is appealing to investors looking for a safe product.

The second proposal would give fund boards for institutional and retail funds the authority to impose so-called "liquidity fees and redemption gates" during times of stress.

That would give funds the power to stop an outflow of investor money, an idea that the SEC's two Republican commissioners last year said they might be able to support.

Schapiro in a statement applauded the movement on a proposal, but said, "I hope the Commission will remain open to meaningful reform of the entire sector and not just institutional prime funds."

The five commissioners voted unanimously on Wednesday to put the plan out for 90 days of public comment.
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Federal Reserve Governor Daniel Tarullo ... at a Washington conference on how to handle failing banks. ...

Tarullo spoke at the Fed-sponsored conference as regulators weigh how to avert a repeat of the taxpayer-backed bailouts during the 2008 credit crisis. The Dodd-Frank Act requires large lenders to create living wills to describe how they could be wound down in a bankruptcy. If that doesn’t work, the Federal Deposit Insurance Corp. can step in, liquidate the bank and force losses on shareholders and creditors.

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Tarullo said that if creditors and counterparties don’t believe the FDIC can successfully manage a resolution, they may misprice risk by assuming a bailout will result.

“If investors and other market actors think the prospects for orderly resolution seem low, they may assume the firm will be rescued by the government, and any moral hazard present in these markets will continue,” Tarullo said in prepared remarks.

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One critical component, regulators say, is having enough long-term unsecured debt to convert into equity to help absorb losses and keep a distressed bank running until the firm could be sold or dismantled, known as a “bail-in.”
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PMBug said:

The Fed recently made some noise about increasing bank reserve requirements to avoid a potential bail in:

http://www.bloomberg.com/news/2013-...-down-plan-so-creditors-don-t-shun-banks.html

A few details on the new Fed requirements:

http://www.huffingtonpost.com/2013/10/24/federal-reserve-liquidity_n_4158388.html

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The bank bail-in rumble is growing louder. After the events in Cyprus, a small country and potentially meaningless in the eyes of most people, it seems that bail-in idea has spread like a virus across the Western world.

Only in the last week, we saw the following developments:

• Slovenian parliament has approved bank bail-in rules. (source)
• The leader of the Eurogroup Working Group (Thomas Wieser) revealed that the eurozone should introduce bank bail-in rules from 2016, as reported by the German Der Spiegel. (source)
• UK based Co-operative Bank announced a bondholder bail-in rescue plan. (source)

All these events come right after the IMF super tax proposal of 10% on savings accounts of households with a positive net worth in Europe (reported on this site) earlier this month.
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A major conference on the future of banking yesterday heard contributions on a European banking union which is being negotiated by Eurozone finance ministers. One of the aspects of that union will be a 'bail-in' of deposits when banks fail in the future. Michael Noonan, Ireland’s Minister for Finance confirmed yesterday that bail-ins or deposit confiscation will be used.

The toolkit underpinning the Single Resolution Mechanism is provided for in the bank recovery and resolution proposal (BRR) which was agreed last June in Council under the Irish Presidency. The proposal provides a common framework of rules and powers to help EU countries manage arrangements to deal with failing banks at national level as well as cross-border banks, whilst preserving essential bank operations and minimising taxpayers' exposure to losses.

One of the main pillars to the BRR framework to facilitate a range of actions by authorities are “resolution tools”. Noonan confirmed yesterday that resolution tools include the sale of business, bridge bank and asset separation tools and also the use of bailins.
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