Tuesday, March 29, 2016

Bank 'bail-ins': you are sheep to be sheared

We've spoken of bank 'bail-ins' in these pages on several occasions, dating back to the Cyprus crisis.  Basically, it involves depositor funds being confiscated to refinance struggling banks and other financial institutions.  Here's a selection of some of my past articles on the subject:

Now Canada appears to be heading down that road as well.  Inquisitr reports:

The federal Canadian government unveiled its stimulus Budget 2016 on March 22, which included information about the majority Liberal party’s intention to implement a banking “bail-in regime.”

“To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as ‘too-big-to-fail.'”
. . .

It is thought that these bail-in proposals would not affect investments, such as bank deposits up to $100,000, and sometimes more, protected by the Canada Deposit Insurance Corporation (CDIC), as previously featured by the Inquisitr.

The problem with this, as has been discussed with Press For Truth, who describes the CDIC as a “Ponzi scheme” and points out that in 2013, the corporation only had $2.5 billion set aside to cover investor losses, up to just over $3 billion in 2015. Three billion dollars covers 30,000 accounts worth $100,000 each.

The CDIC reports that in 2015, they insured $684 billion of Canadians’ savings; with $3 billion. A situation that is described as the CDIC not being able to “cover all Canadian deposits.”

So, Canadians need to understand that only CDIC-insured investments are protected by the government, and savings above $100,000 may be subject to bail-in events where a certain amount could disappear. And to keep in mind that the CDIC only has enough to cover about 0.004 percent of existing insured investments. And keep in mind that this process is already well underway in Europe.

There's more at the link.

Do, please, note the point about deposit insurance above.  I commented on the same reality in the USA in an article in January this year, and outlined what I was doing to protect myself.

"But," you object, "my savings account and CD's are insured by the FDIC.  Even if the bank took my money, the US government would have to repay me!"  Oh, yeah?  Sure, there's insurance on your deposits . . . but it says not one word about when you'll get back your money, or in what form.  Say a bank needs recapitalization, and seizes your deposit(s) as part of the process.  You immediately apply to the FDIC for compensation.  After a long delay (during which you can't access your money), that agency says loftily that yes, it'll refund your money - but only in the form of bonds issued against the bank's capital, or shares in the new entity that replaced it.  (That's the 'bail-inable long-term debt' that Mr. Fischer was talking about - see above.) The FDIC or another government agency will determine the value of those bonds or shares, not you - and their valuation may have little or nothing to do with reality.  Furthermore, you'll only be allowed to sell or otherwise convert them after a suitable period - say, five years?  Ten years?  Twenty-five years?  Whatever it is, you're still S.O.L. and broke - but hey, the insurance policy worked!  By strict legal definition, it covered your losses!

. . .

How can we protect ourselves against that possibility?  There's only one way I can see - keep as much as possible of your savings in a form that will be hard to confiscate.  I'm trying to slowly build up to the point where I have two to three months' actual expenditure in the form of cash, securely stored in a safe place - but not in a bank account or deposit box, where the banksters can get their greedy hands on it.  I'm also putting what I can into precious metals - gold and silver coins.  I'm a very small investor indeed, which means I can't get the best prices on such assets, but I do what I can.  If I had a hundred thousand dollars in savings today (I wish!), I'd have a quarter of it in precious metals, a quarter in cash, and the rest divided between savings accounts in two or three different financial institutions, just in case.  That way, if one or two assets 'went bad' or were confiscated, I wouldn't lose everything.  YMMV, of course.

Again, more at the link.

I should also note that the FDIC has about $25 billion available, but insures bank accounts in the trillions of dollars.  An excellent graphic illustration of just how inadequate the FDIC's coverage really is may be found hereI'm not joking or exaggerating when I say it's scary as hell.

I can only urge my Canadian readers to take appropriate precautions - and my US readers to read the signs of the times, and react accordingly.  If you think your money is safe in a bank during these trying economic times, you're living in cloud cuckoo land.  We don't have any choice but to use banks, of course - our economy's set up that way - but we can, at a minimum, take precautions to make sure that at least some of our hard-earned cash and assets are protected against government greed and bankster rapaciousness.



White Knight Leo #0368 said...

"Store your savings in a form that is hard to confiscate"

Like, say... ammo?

Erik said...

One problem with storing cash, that may not be a problem in the US but certainly can be in other countries, such as Scandinavia for instance.

Sweden at the moment is in the process of changing out the currency notes, to notes of a new appearance. (This has also been done before at regular intervals.) The transition period is a couple of months, less than a year. So from the moment the new paper money are available to when the old paper money are void is less than a year. If you have cash stored in the old currency after that date, it's now worthless. So you need to switch all the currency you have to the new bills.

However, if you go into a bank with a few thousand dollars worth and ask them to exchange it you will get a lot of questions. Why do you have so much cash? Where did you get it? Basically the same questions they ask to prevent money laundering. And if you say that you just like to have a lot of cash stored I'll assume that knowledge will be shared with different authorities. I'd also not consider it unlikely that the money will be confiscated if your answers are not deemed satisfactory.

While I don't have a particularly large amount of cash stored, it does present a problem for me, since I'd rather not walk into a bank with something like a months salary. I will most likely try to use the "old" money for cash payments while stocking up on the "new" currency. If done consistently I will probably manage during the time frame.

I just thought I should mention it as a potential issue, depending on where you live. If lots of people start storing cash and it becomes a serious problem I can see how politicians and bankers in different countries can see that as a solution, to get the cash into the banks.

So it's wise to have savings in other forms as well.

Peter said...

@Erik: Another way is to keep some of your cash reserves in other currencies that are readily convertible (e.g. Euros, US dollars, UK pounds, etc.). That way, you can exchange them for local currency when needed, or use them if you need to travel during a time when foreign currencies are difficult to obtain.

Gorges Smythe said...

I took all my money out of the bank long ago for just such reasons. Anymore, I don't have any to begin with.

Jonathan H said...

I have a couple of comments, on various threads of this subject:
- In situation like this, it becomes important which bank you use - you want to work with a bank that has a solid reputation and is focused on banking, not investing. Over half of American deposits are with the big 5 banks; they are all heavily involved in investing, both in the stock market as well as a range of common and exotic securities, plus heavily exposed to the derivative markets.
Here is a list of the biggest US banks by assets: http://www.relbanks.com/top-us-banks/assets

- There are deposit insurance options other than the FDIC; each one will handle claims differently. Many credit unions use the NCUA, which is government backed - some use ASI, American Share Insurance, which is a private deposit guaranty corporation, owned by member credit unions. Only state chartered credit unions in 9 states have the option of private insurance; credit unions in other states and all federally chartered and corporate credit unions must use the NCUA. You can find more information here: http://www.americanshare.com/index.php

- Lastly: I agree with Peter to minimize the amount of money you have in a bank account; it doesn't earn much interest there and is vulnerable to bank problems. If you have more than 3 months (my rule of thumb) on hand, you should invest the excess. It is unlikely, for several reasons, that stock ownership will be taken over by the government. For those of you that are Christians, a little known investment is the Church Extension Fund - denominationally affiliated non-profit groups that invest in church land purchases and construction. They offer better returns than bank accounts and your money will help where you want it to. There are about 30 of these funds; not all denominations have them. An example of one is here: http://thesolomonfoundation.org/
Alternatively, you can look for or start a local business or invest the 'excess' in land, being prepared, or other in hand means. Keep in mind that what you do needs to be readily convertible into what you need when you need it, so there is merit to being within the banking system for now - if you are wise about how you do it!
(Caveat: I am am not an investment professional and this is not investment advice, merely food for thought)

Anonymous said...

No worries for me. I have no savings, and lots of debts.

Bring. It. On.


Borepatch said...

On the one hand, there's some transparency at work here. If your bank fails, your deposits can disappear. The "bail-in" approach is just a different way of stating this.

On the other hand, this sounds like an excellent way to start bank runs.

Tom Bridgeland said...

Agree with Borepatch above. This really doesn't change anything. Any investment has risks of loss, and while people tend not to think of bank accounts as investments, they are. The problem is depositor's ignorance. This law may actually be a good thing, if it results in more people becoming aware of the risk.
Unless you are running a business that needs lots of liquidity, or if you as an individual have a short-term need to have cash available, such as planning to buy a car with cash, I don't see any reason to have more than a month's worth of income in a bank account.
It should be working for you in some kind of investment with better returns than a bank's interest. Or, if you think the end is nigh, used to buy prepper items.

Douglas2 said...

Let me tell you about my high-interest savings account with an Icelandic bank...

freddie_mac said...

divided between savings accounts in two or three different financial institutions

I'm hoping to sell my house in the next year, and I've been thinking about splitting the proceeds btw a few accounts just to be safe. IIRC, last time there were bank problems in the US (possibly with WaMu), I remember hearing about a woman who sold her house and deposited the proceeds in the bank on Friday. Come Monday, anything over the FDIC amount was gone ...

drjim said...

And from what I've read, it can takes months for the FDIC to pay off.

B said...

It can take any amount of time that the FDIC decides it takes to pay off. Moths, years, decades even.

And it doesn't matter how many banks you put your money in, you are only insured to $100K (temprorarily sometimes $250K) per person (or per SSN).

Not that the FDIC has that kind of money to issue as insurance should there be a real bank run. Once one or two go, they all will.