Whose Insured Deposits Will Be Plundered Next?

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According to Zero Hedge, it could be Spain:

 Spain, it would appear, has changed constitutional rules to enable a so-called ‘moderate’ levy on deposits.

New legislation in New Zealand suggests that depositor funds could be used to bail out banks there, too.

Far more worrying for American and British depositors though is this paragraph Golem XIV brings up from a joint Bank of England and FDIC paper from 2012 which points to the possibility of using deposit insurance funds to bail out illiquid banks:

The U.K. has also given consideration to the recapitalization process in a scenario in which a G-SIFI’s liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalization of the firm, as they may do under the Banking Act in the use of other resolution tools. The proposed RRD also permits such an approach because it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in, provided that the amount contributed does not exceed what the deposit guarantee scheme would have as a claimant in liquidation if it had made a payout to the insured depositors.

Of course, if deposit insurance money is used as a resolution tool to bail out a bank which then goes on to fail anyway (as we have already seen multiple times since 2008 — a bank receives a large liquidity injection, and goes onto fail anyway) depositors could end up moneyless.

As Golem XIV notes:

The new system makes the Deposit Guarantee fund available for use as bail out money.

The rationale is that if using your deposit guarantee fund for propping up the bank ‘saves’ the bank from collapse then you wouldn’t need that deposit guarantee would you? This overlooks the one lesson we have all learned from the bank bail outs of the last 5 years, that the bail outs are never, ever, ever, a one off. The first one fails to save the bank as does the second and third and and and.

So if I have read the above correctly – the new system raids the Deposit Protection scheme, gives it to the bank instead of you  and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme.

Now, in the case of this kind of scenario actually happening, it seems probable that governments and central banks would try to replenish the deposit insurance fund. Whether the fund would be replenished to its full extent, or whether insured depositors would suffer an effective haircut remains to be seen.

These kinds of policy suggestions coming from governments and central banks are extremely worrying for depositors, because it implies that what is happening to Cypriot depositors and Cypriot banks could be forced onto British and American depositors. In a worst-case-scenario, criminally minded bankers (of which there seem to be many) could even use this provision to intentionally run off with deposits.

We know that the TBTF banking sector (or G-SIFI’s — global systemically important financial institutions — as they are now known) remains fragile, over-connected and dependent on insider advantages. That means that over the next few years, it remains possible that there could be another severe banking crisis in Britain or America or both.

Just what in the world do financial regulators think they are doing even implying that depositor guarantee funds could be used to bail out banks under such an eventuality? Such a recommendation — and the attendant possibility of insured depositor haircuts — could severely impact confidence in the banking sector, just as it has done in Cyprus. The possibility that insurance money may go down the toilet to bail out illiquid banks will make some uneasy to invest their money in the banks. If a severe banking crisis looms, it could lead to bank runs, just as is happening in Cyprus. The trend, if events in Cyprus and Europe continue to escalate, and if other jurisdictions do not take steps to protect depositors from banker greed, is toward depositors losing faith in the banking system, and seeking other stores of purchasing power — mattress stuffing, bitcoin, tangibles.

Essentially, if there is to be any confidence in the banking system, the possibility of depleting liquidity insurance funds to bail out banks needs to be taken off the table completely. The possibility of insured depositor haircuts needs to be taken off the table completely. If banks need bailing out, the money must not come from insured depositors, or funds designed to compensate insured depositors. If banks fail, the losers should be the uninsured creditors.

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44 thoughts on “Whose Insured Deposits Will Be Plundered Next?

  1. Banks that made bad debts failed all the time, and bank runs were common. Then Governments, through increased taxation laws used the Treasury to backstop crony banks, make them safer, and allowed Banks to monopolise and grow by gobbling up un-connected banks.

    Australia had a lot of Banks. In the Gold rush times. Now we have only 4 major players.

    Governments are technically broke, so in reality, they don’t have the ability to protect their crony banks. It is each man for himself now.

    With interest rates just keeping up with inflation, it would be better to find alternative sources of wealth. What is valuable, in demand now and in the future, can be stored on land and does not deteriorate?

    It is a declining commodity, and is relatively cheap at the moment, way off its 2007 highs. In a time of war, half wit soldiers would not realise its value. It can be easily buried too if need be.

    I will leave readers to ponder, and I have discussed in earlier posts, if you need clues.

    BTW ITS NOT GOLD OR METALLIC.

    • hahahha good try.

      Bitumen. Nat gas does not have bitumen as a by-product. Nat gas is the future energy, but we need bitumen to seal roads. I saw Indian workers with a wheel barrow a fire a pot and chunks of bitumen, fixing a road by hand, in the upper Himalayas. We need bitumen so the cars of today can drive on smooth roads. Try getting good efficiency from heavily beefed up suspension on an unsealed road. Impossible.

      Bitumen will become very expensive, as only the capital cities will be sealed. It will be like 100 years ago, with potted roads. Horse and Cart. Only the rich will whizz around on sealed roads. Paying a electronic toll of course.

      I am buying blocks of it and storing underground as we speak. Bough an old excavator. Like being in the sandpit again! Grow crops and run sheep over the top of it. It is preety cheap as it is a by-product now. But will run out eventually.

  2. it seems probable that governments and central banks would try to replenish the deposit insurance fund.

    You don’t think like a politician – with envy and power as your guiding principles.

    I’d bet the US solution would be a capital loss that could be taken as an income tax deduction over 10 years, with a max of 10K per year. God forbid some non-elite rich person (aka anyone in the top quintile not in the top 1%) get some lump sum of “new” money that they will likely buy assets with (because they certainly wouldn’t redeposit into another bank) – that might cause a bubble that the elites wouldn’t be able to milk for a period of years,. And you certainly wouldn’t want to help the rich people that had deposits up to the FDIC limit in multiple (read: two) banks.

    After the middle class is plundered, the rich (aka the upper-middle class) are next.

  3. If banks fail, the losers should be the uninsured creditors.

    And who are they? Who holds the bonds and equity shares of these TBTF banks?

    You’re basically saying you won’t lose your deposits, but you lose your retirement plan instead. This means the demographics will decide what happens. And they already did in the “last crisis” of 2007 when basically the choice was to save the banks by raping the taxpayers and savers or expose the pension bomb (especially the public employee pension bomb). We forget that the housing bubble would have had a softer crash if not for public employee pensions pressuring the GSE’s to “get in on the housing market gains” by lowering their loan purchasing standards; housing was about to have a small crash in ’03 but the GSE’s came to the “rescue” and pumped the bubble some more.

    • In an Banks accounting system, deposits are liabilities. Depositors are creditors, like any other lender. The longer they “lend” the more interest they get for example term deposits.

      People got complacent with FDIC insurance and similar government guarantees. At the end of the day the bank invests in “assets” i.e. loans them out to borrowers. If they make bad choices, under current Basel 3 guidelines, capital takes a hit on losses. If capital is severely stretched, they may choose to have a capital raising. If markets seize up, creditors miss out.

      We should never have allowed banks to invest in sub prime loans, or shabby beach houses along the Mediterranean sea.

      • I don’t have a problem with banks making stupid loans because banks can go bankrupt. If that makes deposits at risk, so be it; the depositors made those choices individually. You are correct that people get complacent with deposit guarantees. The problem I have is screwing the depositors WITHOUT the bank going bankrupt and its bondholder taking no loss.

        I have a BIG problem with GSE’s making those kinds of loans. Because the government will rape its subjects to avoid its own bankruptcy. But the individuals losing out did not make those risk decisions, complacent or not; in fact you are rewarding the few who made the poor high-risk decisions at the expense of those smart enough to purposely avoid the risk. I suppose one could argue that the way we treat banks of a certain size they are basically GSE’s and therefore no different than government itself.

        • Do not forget that these Cypriot banks paid very high interest rates. They also bet big on the Greek economy. This is a fact that has to be taken in the context of losses. In a way the interest paid in the past is being taken back. Depositors have become defacto equity owners. Their deposits capital contributions, with interest a profit share.

          This will make people around the world question their bank. Perhaps banks need to segregate deposits on a slidig scale. much like the investment scale many 401k have. 0% for 100% Government backing (Banks pay insurance to Government, so this offsets the interest paid) up to 10% for funds invested in high risk property. This would relate better to the criticisms of banking by Hyman Minsky. When interest rates go crazy, people can dive in or use as a warning of a credit bubble.

  4. All systems are designed so that the few [the designers] can [legally] steal from the many.

    When people watch the kind of stealing that has been going on since 2008, it is like a six year old walking in on their parents for the first time and thinking to himself that there must be some kind of mistake here.

    The stealing that generally goes in [in non-crisis times] is much more subtle, but it’s stealing just the same. People deal with in by rationalizing this, that, or the other thing, because coming to grips with reality would suggest that they would actually have to take responsibility for their own lives, something few are willing to do.

    The wealthy always have a thousand reasons why they should be privileged [allowed to steal], but few are willing to acknowledge the truth of the matter. It becomes very clear in times of crisis, though, how the manipulation of money destroys the only thing the vast majority of people on this planet have, their labor to sell.

    Although in a free labor market, you can not refuse to pay someone their wage, you can do the next best thing, manipulate their money [their labor-value, abstracted]. Printing money is the same as withholding a person wages.

    Stealing, stealing, stealing, how we humans LOVE to get something for nothing!

  5. Aziz’s final sentence says, “..the losers should be the uninsured creditors.” – those being shareholders and bondholders.

    But the problem is that the latter attend the same cocktail parties as senior politicians, and one doesn’t want to upset those one meets at cocktail parties, does one? Plus bondholders are often other financial institutions, thus shafting bondholders can just spread contagion.

    That’s where those new fangled “bail-in” bonds are a farce. Bond holders, as Aziz rightly points out, should get a hair cut before depositors. But political pressures tend to stop that. And exactly the same political pressures will make sure in the future that “bail-in bond holders” are spared.

    • The problem is the Bondholders are not the tycoons of yesteryear bu the PIMCOS who everyone’s 401K bond default or % allocation is in.

      Basically everybody loses, except for the guy who bough houses in the mid 90’s, sold them all in the 2006 financial year, bought himself used car, and put his money in the bank. When Bernanke said he saw “Green Shoots”, he dialed his broker and bought Apple, Then sold Apple at the peak. His money is quietly parked in US Treasuries now.

      For everybody else who passively invests it is bad luck.

  6. “Stealing, stealing, stealing, how we humans LOVE to get something for nothing”

    This is really at the bottom of all history…how can I get others to work while I reap the rewards….this is the ultimate goal of all would be elite ruler and group. I am special and others should spend their lives working while I spend my life lording it over them and consuming their labor products.

    • Although a decreasing percentage of human labor is contained with each [commodity] unit a robot puts-out, it is only when this quantity approaches zero that Marx’s theory will be put to the test.

      Again, the problem with this era is not the above, as this has been going on since the beginning, but instead, that fact that capital is NOT being employed in new areas due all the omni-present dys-function [corruption, financialisation, money/interest rate manipulation, lack of market transparency, etc.].

      The amount of crap people desire is [literally] endless, so once “normal” capital markets are re-established, the material frenzy will resume and your children/grandchildren will be amusing themselves with an entirely new generation of do-dads, gizmos, and what-nots.

  7. IMF and EU want to broker the development of the natural gas reserves. Greeks and Turks at odds over how to divide energy rights. EU energy companies unwilling to sign deal fearing increased tensions on the island… Greek Cypriots independently moving forward with Russian oil interests… Turkey puts pressure on EU….. on and on and on… EU and IMF was sending two messages…. “Cyprus share the wealth with the north” ” Russia stay out of this one ” US and Europe used the TBTF as cover for the real issue….

    In the energy business “unproven” reserves means the drilling rights have not been settled. Everyone knows there is at least half a trillion dollars of gas and oil off the Cyprus coast… the question is who will profit? Just as a side note… There are comparable reserves off the coast of Israel.

  8. God I love this blog and all the blogger contributions of thought and ideas…

    Financially, I do not contribute to this blog because most of you are “way above my head…” and as i have been brought up, that “sciolism is worse than ignorance..”

    So my question to all of the you is this….

    Where do I invest my small savings and capital strengths in times like this? I was always was a fan of land, even if ROI was low and I continue to source and seek cheap land, as the majority in my country do not want it out fear of high taxation in the future. Right now the tax is only 1/1000 th of th “book” value per hectare. But I fear this will increase greatly as so large amounts of land masses can be acquired cheaply by big agricultural corporations.

    Small amounts in the bank with a whopping 5% interest, but sometimes i fear the large interest rate is a carrot as a bait. Meanwhile the government has increased the tax on interest to 15%.

    As i have stated in a previous post, i am also getting taxed through the arse in every other aspect of my life.

    Any takers??????

    As for the natural resources between Greece and Cyprus? Natural Gas, Petrol deposits, precious metal mineral deposits, gold, copper etc…. This will be taken…. no questions asked……

    • I do not give investment advice for others, but personally I want to be able to generate enough energy to fulfil my own energy needs. As solar panel efficiency improves, doing this will get cheaper and cheaper. It creates personal energy independence (that is true even today) and as efficiencies improve will soon offer savings over coal, oil and gas. By the end of the decade I hope to have a personal 3D printer for home-based manufacturing, a solar and wind array that meets my entire energy needs, and greenhouses that grow plenty of food.

      • I already have a 100% fully solar powered home with three heat pumps, electric oven, multiple refrigerators and huge freezer, Samsung SmartTV’s, etc….but my wife doesn’t like the desert, so we’re trying to sell if you know of anyone interested:

        http://www.viviun.com/AD-190045/

      • Hi Aziz,
        Thanks for your feedback. I also am strong believer of ECO power. I also currently have an approved permit of 10kw solar panel farm. I am skeptical though to proceed as it is “On Grid.” I would have proceeded, as currently in Greece, renewable energy income is not taxed, but as nothing is sure in my country, I am not sure if this venture is worth while. Firstly, an investment of about 15-20,000 euro at last year’s buying price was 0,55 euro/kw, has been slashed to 0,33 euro/kw and will continue to drop radically (Troika Orders). It gives me a payoff of the initial investment at 10-12 years versus the original of 5-6 years. The contract would be 25 years. I am not so sure to spend meanwhile at some point get hit with taxes.

        “Off grid” provides no income but gives energy freedom. Although it has a larger investment due to batteries. Plus maintenance etc. Next to this solar farm idea, is the possible summer home which i would like to build which ofcourse will be ECO.

        I am not giving up on renewable energy but right now it does not look good. I hope technology will improve that transformers will create direct energy to energy efficient appliances etc.

    • ” But I fear this will increase greatly as so large amounts of land masses can be acquired cheaply by big agricultural corporations.”

      I invest in land. Provided Governments don’t appropriate with high land taxes this is a secure strategy. You can always raise a few chickens and sheep and vegetables and read a good book, drink a little wine and listen to your favorite music. TVs and DVD are cheap now so you can invest in a comfy sofa and relax.

      Best investment is a deluxe bed. You spend a 3rd of your life in it. Rich or poor.

    • “Any takers??????”

      Here’s the deal, you have to figure out exactly how much labor-value you want to steal from other people; then you have to figure out which group of people [and most of the planet is dedicated to this task] is the best at stealing from other people; send them some of your abstracted labor-value, and they will use it like a weapon in holding-up the [generally-speaking] most vulnerable, the poorest, the most oppressed people on the planet so that you can enjoy more Doritos, up your cable tv subscription to 7634 channels, and download pornography at 65,789 bps [breasts per second].

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  10. When we say oil and gas off the coast if Isreal, don’t we mean Isreal and Palistine. Correct me if i’m wrong, dosen’t Gaza sit on the coast, don’t they control 200 miles out as everyone else. Come to think of it, much of Palastine sits to the east of Isreal. Or did!! Move along nothing to see here .

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