While you were sleeping, leaders of the “free world” have been actively transforming their financial systems.
Could the United States and the United Kingdom become the next Cyprus where private bank deposits are seized to recapitalize failed banks?
According to a report written by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England called: “Resolving Globally Active, Systemically Important, Financial Institutions,” the answer is yes.
The 15-page report, dated December 10, 2012, was written, according to its executive summary, to address: “the importance of an orderly resolution process for globally active, systemically important, financial institutions (G-SIFIs),” after the 2007 financial crisis. Since then the United States and the United Kingdom have been working together to develop resolution strategies that could be applied to their respective largest financial institutions.
The following comes from page 3, Section 12 and 13 of the report:
12. Under the strategies currently being developed by the U.S. and the U.K., the resolution authority could intervene at the top of the group. Culpable senior management of the parent and operating businesses would be removed, and losses would be apportioned to shareholders and unsecured creditors. In all likelihood, shareholders would lose all value and unsecured creditors should thus expect that their claims would be written down to reflect any losses that shareholders did not cover.
Under both the U.S. and U.K. approaches, legal safeguards ensure that creditors recover no less than they would under insolvency.
13. An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself thus, the highest layer of surviving bailed –in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution. Throughout, subsidiaries (domestic and foreign) carrying out critical activities would be kept open and operating, thereby limiting contagion effects. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers.
In the event of a bank failure, if taxpayer money is not used to bail the bank out, and the bank is not allowed to fail, then like what happened to Cyprus depositors, U.S. and U.K. bank deposits (unsecured debt, the new shareholders) could be seized to re-capitalize the bank.
How could what happened to Cyprus be allowed to possibly happen in the U.S.? The credit goes to the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Barack Obama signed into federal law on July 21, 2010.
Sponsored by former Financial Services Committee Chairman Barney Frank (D-Mass) and in the Senate Banking Committee by former Chairman Chris Dodd (D-Conn.), the 2000 page bill that “fundamentally reshaped the financial system” was passed with six Republican votes.
As the Resolving Globally Active, Systemically Important, Financial Institutions report explains on pages 3-4 Section 14 and 15:
Legislative frameworks for implementing the strategy
14. 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 (Financial Stability Board) 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.
15. The framework provided by the Dodd – Frank Act in the U.S. greatly enhances the ability of regulators to address the problems of large, complex financial institutions in any future crisis …
While Canadians demand answers from their leaders, now Americans and the British must also demand answers from theirs.
Update: So it is true and a part of international agreements. Brian Lilley of Sun News asked officials from Canada’s Finance Minister Jim Flaherty’s office for comment on what the ‘bail-in’ section meant in Canada’s budget. Below is the response from Flaherty’s Director of Communications Dan Miles.
“Bail-in arrangements are NOT ‘bail-out’ arrangements∙
Under a ‘bail-out’ arrangements, taxpayers money has to be used to save a failing financial institution∙
Under a ‘bail-in’ arrangements, a failing financial institution has to tap into their own special reserves or assets (which they have been forced to put aside) to keep their operations going∙
This keeps the financial institution in tract, without risking taxpayer money. This is what Canada is doing, in line with recent international agreements.”
As Brian Lilley wrote: No denial in there that depositors will be asked to pay up if Canadian banks fail. Some think that is a probability that will never happen but obviously the Finance Department thinks it could happen or it would not devise rules. The Big Six Banks were also recently told to up their capital requirements to prevent failure.So unless Miles is not telling me something, the new regime in Canada is that deposits up to $100,000 will be insured through the Canada Deposit Insurance Corporation and anything else that you hold with a single bank will be up for grabs if that bank fails.
Update 2016: Bank of Canada Lawsuit
Watch: Video: Rocco Galati challenges Bank of Canada to offer interest-free loans