bank runs

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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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“Get Your Money Out While You Can”

One can only wonder how long it will take before Europeans particularly in Spain, Greece and Italy, begin to take that advice.

The Euro system amplifies shocks. Monetary union without fiscal union, economic integration without high levels of interstate mobility, enforced austerity in the weakest economies. And now the precedent of deposit confiscation. The only indicator that seems to be rising throughout the Eurozone is the number of protest signs comparing Angela Merkel to Hitler.

Romano Prodi famously noted that the Euro system was weak, and that necessary reforms would be made when the time came in order to make it sustainable. Well, the Cyprus bailout and deposit levy, the national and international outcries and the subsequent “no” vote in the Cypriot parliament are all signs that in the wake of all the bailouts of the periphery that Europe is far from fixed. The necessary measures have not been taken. While the ECB may have taken measures to lower government borrowing costs in the periphery, the situation is in many ways — especially unemployment — still deteriorating. In fact, it seems like Eurocrats are trying to enforce the opposite of what might be necessary for sustainability — rather than installing a mechanism to transfer money to weakened economies suffering from high employment, Eurocrats seem to be trying to do everything to drive unemployment higher in the periphery, spark bank runs, as well as aggravate tensions with Russia.

This is a crisis of institutions and a crisis of leadership as well as a crisis of economics. Merkel cannot lead Europe and Germany at the same time, because taking steps to revive the ailing Southern economies hurts her standing with the German and Northern public.

The Eurocrats have asked for a bank run by demanding depositor haircuts in Cyprus. The public would not be at fault for giving them one. Farage’s advice is wise.

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There Is No Surer Way To Destroy A Banking System Than Giving Depositors A Haircut

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No, not that kind of haircut.

I’m talking about the kind of haircut where depositors lose a portion of their money. This can destroy confidence in a fractional reserve banking system, as depositors in other banks and other countries fear that they too might be forced to take a haircut, leading to mass withdrawals, leading to illiquidity. And — as part of an E.U. bailout of the Cypriot financial system this just happened in Cyprus:

Eurozone finance ministers have agreed a 10bn-euro (£8.7bn) bailout package for Cyprus to save the country from bankruptcy.

The deal was reached after talks in Brussels between the ministers and the International Monetary Fund (IMF).

In return, Cyprus is being asked to trim its deficit, shrink its banking sector and increase taxes.

For the first time in a eurozone bailout, bank depositors are facing a levy on their savings.

This attack on depositors will have clear implications for depositors and banks in other bailout-prone areas of the Eurozone — Spain, Italy, Greece, Portugal. If the EU is prepared to impose haircuts of up to 10% on depositors in Cyprus as part of a bailout package, which countries’ depositors will be forced to take a haircut next? Mattress-stuffing Cypriots will be 10% better-off than their compatriots with confidence in the banking system. Even if only 10% or 20% of bank customers in Spain choose to withdraw their funds, that has the potential to cause serious liquidity problems.

Whether or not this actually happens is another question — although with unemployment running high throughout the Eurozone, those with savings may be particularly wary of losing them. This decision — no matter how many times Draghi and Merkel and Barroso reassure the crowds — makes bank runs throughout the Eurozone much more likely as savers seek to avoid the possibility of a haircut by moving to cash or tangible assets.

And this madness was totally avoidable.

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UK Banks Want to Charge Customers for Accounts

This is nuts. UK banks want to charge customers for the privilege of handing over their money and letting banks gamble it in the global derivatives casino.

From the Telegraph:

A groundswell of support for change is understood to be gathering among the authorities. The Treasury’s advisers on the Independent Commission on Banking and the Office of Fair Trading are said to be also backing the proposals, alongside the treasury select committee and financial regulators.

Britain is the only country in Europe to operate a “free-in-credit” model of current account banking. Instead of levying fees on an account, lenders make their money through “stealth charges” on overdrafts and cross-selling of other products. Only India and Australia run equivalent models.

Regulators and officials want to reform the system to boost competition by making it easier to compare rival accounts. They also believe so-called “free banking” encourages mis-selling of financial products, exposes banks to compensation risks and lets customers down.

So the impression that bankers and regulators have seems to be that banks are doing customers a favour by holding onto their money and occasionally losing it all buying junk securities.

Nope. In a free market, banks that tried to charge customers for the privilege would be laughed out of the marketplace. Banks — by their very definition as intermediaries — generate profits from making good investments, not by charging customers for the privilege of holding their money.

Unfortunately this isn’t a free market, and banks can (and probably will) co-ordinate with each other to keep the market uncompetitive. Barriers to entry make it difficult to impossible for new players to enter the market and dislodge the status quo.

As the Office of Fair Trading noted in their must-read 2010 report:

New entrants to the retail banking sector face significant challenges in attracting customers and expanding their market shares, an OFT review has found.

The review of barriers to entry, expansion and exit in retail banking, published today, was launched in May 2010 to identify any obstacles blocking firms from entering the sector or from successfully competing against existing firms, as well as factors preventing inefficient firms from exiting the market and being replaced by more efficient ones.

Two words: banking cartel. Need I say more?

Anyway, I know what I will do with my money if my bank insists on charging me for the privilege of gambling my money: close my account, and find a bank that won’t charge. Even given the current barriers to entry, the opportunity to undercut the bigger players will be too good an opportunity to miss. And I’m sure lots of other people will do the same. Given that some parts of the UK banking industry (especially the Spanish-owned parts, and especially Banco Santander) are already looking shaky, does the UK banking industry really want customers pulling their money en mass?

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Christine Lagarde: “There is Still too much Debt in the System”.

From the IMF:

There is still too much debt in the system. Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States. Weak growth and weak balance sheets — of governments, financial institutions, and households — are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment, and job creation. This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction.

And she’s right — but with debt-issuers not interested in taking haircuts how can we reduce total global debt? How about growth?

From Zero Hedge:

A brand new study released by the World Economic Forum (WEF) in collaboration with McKinsey (which is a must read if only for its plethora of charts which we are certain will be used and reused in thousands of posts and articles over the next year), finds that while global credit stock doubled from $57 trillion to $109 trillion in just 10 years (from 2000 to 2010), it will need to double again to an incredible $210 trillion by 2020 in order to provide the necessary credit-driven growth (in a recursive way, whereby credit feeds growth, and growth requires additional credit issuance) for world GDP to retain its current growth rate.

So the plan is additional debt, to fund growth, to pay down debt? How is that working out?

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