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http://www.globalresearch.ca/think-your-money-is-safe-in-an-insured-bank-account-think-again/5341812
Think Your Money is Safe in an Insured Bank Account? Think Again.
A trend to shift responsibility for
bank losses onto blameless depositors lets banks gamble away your
money.
When Dutch Finance Minister Jeroen
Dijsselbloem told reporters on March 13, 2013, that the
Cyprus deposit confiscation scheme would be the template for future European
bank bailouts, the statement caused so much furor that he had to retract it. But
the “bail in” of depositor funds is now being made official EU policy. On June
26, 2013, The
New York Times reported that EU finance ministers
have agreed on a plan that shifts the responsibility for bank losses from
governments to bank investors, creditors and uninsured depositors.
Insured deposits (those under €100,000, or
about $130,000) will allegedly be “fully protected.” But protected by whom? The
national insurance funds designed to protect them are inadequate to cover
another system-wide banking crisis, and the court of the European Free Trade
Association ruled in the case of Iceland that the insurance funds were not
intended to cover that sort of systemic collapse.
Shifting the burden of a major bank
collapse from the blameless taxpayer to the blameless depositor is another case
of robbing Peter to pay Paul, while the real perpetrators carry on with their
risky, speculative banking schemes.
Shuffling the Deck Chairs on the
Titanic
Although the bail-in template did not hit
the news until it was imposed on Cyprus in March 2013, it is a global model that
goes back to a
directive from the Financial Stability Board (an arm of
the Bank for International Settlements) dated October 2011, endorsed at the G20
summit in December 2011. In 2009, the G20 nations agreed to be regulated by the
Financial Stability Board; and bail-in policies have now been established for
the US, UK, New Zealand, Australia, and Canada, among other countries. (See
earlier articles here and here.)
The EU bail-in plan, which still needs the
approval of the European Parliament, would allow European leaders to dodge
something they evidently regret having signed, the agreement known as the
European Stability
Mechanism (ESM). Jeroen Dijsselbloem, who played a
leading role in imposing the deposit confiscation plan on Cyprus, said on March
13 that “the aim is for the ESM never to have to be used.”
Passed with little publicity in January
2012, the ESM imposes an open-ended debt on EU member governments, putting
taxpayers on the hook for whatever the ESM’s overseers demand. Two days before
its ratification on July 1, 2012, the agreement was modified
to make the permanent bailout fund cover the bailout of private banks. It was a bankers’ dream – a permanent, mandated bailout of
private banks by governments. But EU governments are now balking at that
heavy commitment.
In Cyprus, the confiscation of depositor
funds was not only approved but mandated by the EU, along with the European
Central Bank (ECB) and the IMF. They told the Cypriots that deposits below
€100,000 in two major bankrupt banks would be subject to a 6.75 percent levy or
“haircut,” while those over €100,000 would be hit with a 9.99 percent “fine.”
When the Cyprus national legislature overwhelming rejected the levy, the insured
deposits under €100,000 were spared; but it was at
the expense of the uninsured deposits, which took a much
larger hit, estimated at about 60 percent of the deposited funds.
The Elusive Promise of Deposit
Insurance
While the insured depositors escaped in
Cyprus, they might not fare so well in a bank collapse of the sort seen in
2008-09. As Anne Sibert, Professor of Economics at the University of London,
observed in an
April 2nd article on VOX:
Even though it wasn’t adopted, the extraordinary proposal that small depositors should lose a part of their savings – a proposal that had the approval of the Eurogroup, ECB and IMF policymakers – raises the question: Is there any credible protection for small-bank depositors in Europe?
She noted that members of the European
Economic Area (EEA) – which includes the EU, Switzerland, Norway and Iceland –
are required to set up deposit-insurance schemes covering most depositors up to
€100,000, and that these schemes are supposed to be funded with premiums from
the individual country’s banks. But the enforceability of the EEA
insurance mandate came into question when the Icelandic bank Icesave failed in
2008. The matter was taken to the court of the European Free Trade Association,
which said that Iceland did not breach EEA directives on deposit guarantees by
not compensating U.K. and Dutch depositors holding Icesave accounts. The reason:
“The court accepted Iceland’s argument that the EU directive was never meant to
deal with the collapse of an entire banking system.” Sibert comments:
[T]he precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters.
The EU can mandate that governments arrange
for deposit insurance, but if funding is inadequate to cover a systemic
collapse, taxpayers will again be on the hook; and if they are unwilling or
unable to cover the losses (as occurred in Cyprus and Iceland), we’re back to
the unprotected deposits and routine bank failures and bank runs of the
19th century.
In the US, deposit insurance faces similar
funding problems. As of June 30, 2011, the FDIC deposit insurance fund had a
balance of only $3.9 billion to provide loss protection on $6.54
trillion of insured deposits. That means every $10,000
in deposits was protected by only $6 in reserves. The FDIC fund could borrow
from the Treasury, but the Dodd-Frank
Act (Section 716) now bans taxpayer bailouts of most
speculative derivatives activities; and these would be the likely trigger of a
2008-style collapse.
Derivatives claims have “super-priority” in
bankruptcy, meaning they take before all other claims. In the event of a major
derivatives bust at JPMorgan Chase or Bank of America, both of which hold
derivatives with notional values exceeding $70 trillion, the collateral is
liable to be gone before either the FDIC or the other “secured” depositors
(including state and local governments) get to the front of the line. (See
here and here.)
Who Should Pay?
Who should bear the loss in the event of
systemic collapse? The choices currently on the table are limited to taxpayers
and bank creditors, including the largest class of creditor, the depositors.
Imposing the losses on the profligate banks themselves would be more equitable ,
but if they have gambled away the money, they simply won’t have the funds. The
rules need to be changed so that they cannot gamble the money away.
One possibility for achieving this is
area-wide regulation. Sibert writes:[I]t is unreasonable to expect the area as a whole to bail out a particular country’s banks unless it can also supervise that country’s banks. This is problematic for the EEA or even the EU, but it may be possible – at least in the Eurozone – when and if [a] single supervisory mechanism comes into being.
A single regulatory agency for all Eurozone
banks is being negotiated; but even if it were agreed to, the US experience with
the Dodd-Frank regulations imposed on US banks shows that regulation alone is
inadequate to curb bank speculation and prevent systemic risk. In a July 2012
article in The New York Times titled “Wall
Street Is Too Big to Regulate,” Gar Alperovitz
observed:
With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions.
The Nationalization
Option
Nationalization of bankrupt,
systemically-important banks is not a new idea. It was done very successfully,
for example, in
Norway and Sweden in the 1990s. But having the
government clean up the books and then sell the bank back to the private sector
is an inadequate solution. Economist Michael
Hudson maintains:
Real nationalization occurs when
governments act in the public interest to take over private property. . . .
Nationalizing the banks along these lines would mean that the government
would supply the nation’s credit needs. The Treasury would become the source of
new money, replacing commercial bank credit. Presumably this credit would
be lent out for economically and socially productive purposes, not merely to
inflate asset prices while loading down households and business with debt as has
occurred under today’s commercial bank lending
policies.
Anne Sibert proposes another solution along
those lines. Rather than imposing losses on either the taxpayers or the
depositors, they could be absorbed by the central bank, which would have the
power to simply write them off. As lender of last resort, the central bank (the
ECB or the Federal Reserve) can create money with computer entries, without
drawing it from elsewhere or paying it back to anyone.
That solution would allow the depositors to
keep their deposits and would save the taxpayers from having to pay for a
banking crisis they did not create. But there would remain the problem of “moral
hazard” – the temptation of banks to take even greater risks when they know they
can dodge responsibility for them. That problem could be avoided, however, by
making the banks public utilities, mandated to operate in the public interest.
And if they had been public utilities in the first place, the problems of
bail-outs, bail-ins, and banking crises might have been averted
altogether.
Ellen Brown is an
attorney, president of the Public Banking Institute, and author of twelve books,
including Web of Debt and its
recently-published sequel The Public Bank Solution. Her websites are http://WebofDebt.com,
http://PublicBankSolution.com, and http://PublicBankingInstitute.org.
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