Tag: banks

Bail-ins are partial bank defaults

Or if you prefer, involuntary borrower-declared debt relief:

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday. The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

Three things. First, as predicted, the bail-ins weren’t limited to Cyprus, and they won’t be limited to Greece. Second, notice that the amount of deposits immune to bail-ins has fallen from €100,000 to €8,000. Third, this is now entirely legal in most jurisdictions; banks around the world are preparing for just this scenario in your country, everywhere from Australia to the USA.

Remember, a deposit is just an unsecured loan to a bank. So, a bail-in is simply the bank unilaterally telling you that it is not going to pay back a percentage of the loan and will no longer be paying interest on the portion that it will not be paying back.

Why anyone would want to loan to such a borrower without collateral for the paltry amount of interest available, knowing that the borrower can decide at any time how much they want to pay you back (if they want to pay you back at all), is an interesting question to contemplate.

Coming to a nation near you

Greek shuts down its banks:

Banks in Greece and the country’s stock exchange will be shut all week in a sign of the deepening financial crisis. The drastic move comes after people rushed to withdraw their cash amid panic ahead of the referendum on bailout terms. Under the controls, there will be a daily €60 limit on withdrawals from cash machines, which will reopen on Tuesday.

Any fractional-reserve system is doomed as soon as people realize that there are more claims on each piece of paper than can be exercised at any given time. As with everything they do, the banks took something that worked, more or less, and pushed it well beyond the breaking point.

It was eye-opening when I realized that the “ten-percent” reserve system about which we’d learned in college was actually a “less-than-one-percent” reserve system. That was the point when I realized that the global financial system was bound to fail eventually; it simply doesn’t have a sufficient margin of error for predictable events, such as the Greek inability to continue servicing their external debt, much less genuinely unexpected and exogenous shocks.

As awful as bail-ins sound, they are actually much more fair than bail-outs. After all, whether you realize it or not, your “deposits” are actually unsecured loans you have made to the bank. Why you would want to make such a high-risk loan to such an irresponsible borrower without collateral or much in the way of interest is, of course, your business.

UPDATE: It’s official. Greek default tomorrow:

Greece will not pay a 1.6 billon euro loan installment due to the
International Monetary Fund on Tuesday, a Greek government official
confirmed on Monday, highlighting the depth of the financial crisis
facing the country.

This should help settle the debate. The answer is “deflation”.

Holiday

And not the fun kind, in Greece:

Bank of Cyprus, Cyprus’s largest lender, is preparing for an extended bank holiday in Greece as continuing deposits outflows may force authorities to take this type of step and impose capital controls.

“We are preparing to facilitate our customers with operations in Greece with additional liquidity,” a Bank of Cyprus source with knowledge of the situation said on condition of anonymity. “This is something we don’t want to see happening”.

The source said that in recent days the bank saw an increase in deposits inflows, both from Cypriot and Greek depositors, amounting “hundreds of million euros”. Reuters reported on Thursday that European Central Bank Executive Board member Benoit Coeure told euro area’s finance ministers that he was not sure whether Greek bank will be able to open on Monday.

The Bank of Cyprus source also said that the bank cannot be ruled out that a bank holiday in Greece could also affect the Cypriot banking system via the units of Greek banks operating on the island in the form of deposits outflows. The source was not in position to name the amount in additional liquidity the bank will need in the case of a bank holiday in Greece nor the number of its customers that would be affected.

“In that case, a bank holiday in Greece could also prompt Cypriot authorities to also impose a bank holiday in Cyprus,” the Bank of Cyprus source said.

To say nothing of Spain, then Italy…. I strongly suspect we are witnessing the slow unwinding of first the Euro, then the European Union. As untenable as the Euro now is, the EU is even worse off due to its immigration policies that nearly everyone except the EU Commission, the media, and the invaders hate.

UPDATE: Phoenix Capital Research explains that the Greek bailouts had little to do with Greece per se:

The Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.

Back to the drachma

This may be one of the few times I will ever actively endorse the radical wing of a hard left party, but Syriza’s radicals are absolutely doing the right thing with regards to the EU and the Euro:

The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers. Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.

The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.

“This goes well beyond the Left Platform. We are talking serious numbers,” said one Syriza MP involved in the draft. We are all horrified by the idea of surrender, and we will not allow ourselves to be throttled to death by European monetary union,” he told the Telegraph.

Syriza’s Left Platform has studied the Icelandic model, extolled as a success story by the International Monetary Fund itself.

“The Greek banks must be nationalised immediately, along with the creation of a bad bank. There may have to be some restrictions on cash withdrawals,” said one Syriza MP.  “The banks will go ape-shit of course. We are aware that there will be a lot of lawsuits but at the end of the day we are a sovereign power,” he said.

Syriza has a strong ideological motive to strike at the financial elites. They view the banks as the nerve centre of an entrenched oligarchy that has run the country for more than half a century as a family business. Forcing these institutions into bankruptcy provides cover for a socio-political purge, best understood as a revolution.

Without national sovereignty, absolutely no other political position or policy matters. Golden Dawn, ANEL, and the other Greek parties should support the Syriza radicals in this. As should nationalists in Spain and Italy. I would love to see Italy back on the lira. Heck, I still have some.

The banks remind me a little of the SJWs in science fiction.

The creditors argue that ‘Grexit’ would be suicidal for Greece. They have been negotiating on the assumption that Syriza must be bluffing, and will ultimately capitulate. Little thought has gone into possibility that key figures in Athens may be thinking along entirely different lines. 

Depository confiscations coming

If you thought the bank bail-outs were bad, just wait until you see what the bail-ins are like:

The European Commission has ordered 11 EU countries to enact the Bank Recovery and Resolution Directive (BRRD) within two months or be hauled before the EU Court of Justice, according to a report from Reuters on Friday.

The news was not covered in other media despite the important risks and ramifications for depositors and savers throughout the EU and indeed internationally.

The article “EU regulators tell 11 countries to adopt bank bail-in rules” reported how 11 countries are under pressure from the EC and had yet “to fall in line”. The countries were Bulgaria, the Czech Republic, Lithuania, Malta, Poland, Romania, Sweden, Luxembourg, the Netherlands, France and Italy.

France and Italy are two countries who are regarded as having particularly fragile banking systems.

The rules, known as the Bank Recovery and Resolution Directive (BRRD) ostensibly aim to shield taxpayers from the fall out of another banking crisis. Should such a crisis erupt governments will not be obliged to prop up the banks. At any rate most countries are far too deeply indebted to play such a role.

Instead, the burden is being placed on the creditors. As Reuters put it

    The rules seek to shield taxpayers from having to bail out troubled lenders, forcing creditors and shareholders to contribute to the rescue in a process known as “bail-in”.

However, if recent events in Austria are anything to go by, creditors now also include depositors of banks. In April, Austria enacted legislation which removed government liability for all bank deposits.

Until then, the state would protect deposits of ordinary people and companies up to a value of €100,000. In its place a bank deposit insurance fund is being set up. This fund appears inadequate to protect savers’ deposits in the event of any kind of bank failure. We covered the story in more detail here.

Each country will enact its own version of the BRRD. How vulnerable savers are in specific countries is difficult to tell at this time. The drive towards a cashless economy which has accelerated in recent months makes deposit holders and savers ever more vulnerable.

This bail-in legislation which is being driven by the BIS through the Bank of England, ECB, Federal Reserve and Federal Deposit Insurance Corporation (FDIC)  appears designed to protect banks by allowing them to confiscate deposits to prop them up rather than the noble stated objective – “to shield taxpayers”.

This doesn’t sound so bad… until you realize that another word for “bank creditor” is “depositor”.  Remember, your bank deposits are legally loans made from you to the the bank. That’s why they pay you interest, however little that might be.

So, when the bank needs money, instead of going to the taxpayers to get it, they can simply take it from their depositors. This explains why the war on cash is heating up; the banks want to make sure that you don’t take your money out of the banking system in case they need it to pay their debts.

And don’t think this is an EU-only thing. The only reason the USA isn’t taking similar action is because the US banks already have a legal framework that permits it. See: MF Global.

The Greek canary

Default is coming. So is Grexit. Bloomberg’s take:

How long can Greece carry on? With revenues just about covering the pay and pensions bill, there’s not much left over to make even the small(ish) payments due to the IMF in June. If Greece and its banking sector can limp a little further, the state should get a boost from income tax receipts that usually flow in July. Unfortunately, that might come too late to pay the ECB 3.5 billion euros due on July 20, and the repayment that follows in August looks like an impossible challenge without a disbursement of Eurogroup funds.

Should Greece’s citizens begin to lose faith in a positive outcome to negotiations, it’s quite possible that receipts could falter as more of the usual tax payments are held back and taxable activity is curtailed. Still, some boost to the Treasury’s bank balance is likely in July. General government revenues could be lifted by about 3.8 billion euros compared with the average for the other months of the year. That would get some way towards the figure needed to pay the ECB, though it might not come soon enough to avoid a missed payment.

Of course, making it as far as July depends on how long the Greek banking sector can survive. Absent a change to the haircut imposed by the ECB on Greek banks’ collateral, limitations on emergency liquidity assistance are unlikely to pose serious constraints before mid-July. Greek banks have enough collateral to access 93 billion euros in liquidity. That’s 13 billion euros above the current cap. The four-week average of increases by the ECB stands at 1.5 billion. At the current pace of increase, Greek banks could keep borrowing more for about eight weeks to offset deposit flight.

The usual suspects will insist that this is irrelevant because the USA has the ability to “print” its own currency, but again, the limit has nothing to do with printing and everything to do with finding someone willing to either borrow or loan the credit money. Furthermore, the Greek public is obviously quite willing to borrow, whereas the American public is not.

But this superficial assessment omits the fact that all the “Greek bailout” money went to the Greek banks, and deposits are loans to the banks. The negative interest rates beginning to appear around the world mean that the various publics are increasingly unwilling to loan their money to the banks, which is why the various proposals for banning cash and other means of preventing individuals to keep stores of value money outside the ever-widening maw of the banking system are being floated.

It’s a complicated subject and no one understands it completely, to the best of my knowledge. But rest assured that any solution that does not involve most of the banks writing off bad loans and then going out of business will be a failure.

“A job well done”

Now we know why none of the big banks were prosecuted by the Obama administration:

Just after announcing his resignation as U.S. attorney general, Eric Holder has accepted a top job with Wall Street finance giant JPMorgan Chase.

Starting in early November, Holder will serve as JPMorgan Chase’s chief compliance officer, where his responsibilities will include lobbying Congress on the company’s behalf and ensuring it “gets the best deal possible” from any new proposed financial regulations. Holder will also fetch morning coffee and breakfast orders for CEO Jamie Dimon and board members.

For his efforts, Holder will earn an annual salary of $77 million plus bonuses for a job well done.

At this point, I think the federal government should go back to the spoils system. It would be considerably less corrupt.

Best Novel 2016

Ben Bernanke isn’t talking to us in the title of his new account of the 2008 financial crisisnovel, he’s talking to the gentlemen paying his speaker’s fees.

“When the economic well-being of their nation demanded a strong and creative response, my colleagues at the Federal Reserve, policymakers and staff alike, mustered the moral courage to do what was necessary, often in the face of bitter criticism and condemnation. I am grateful to all of them.”

As with all Fedspeak, you have to translate it into English. What he so bravely did was bail out the owners of the large banks at the cost of the US economy. The USA will now never exit the debt-prison into which Helicopter Ben locked it without a catastrophic meltdown.

I think we’re going to need to get a ruling from MidAmeriCon if The Courage to Act will be eligible for Best Novel next year. It certainly contains more fiction than the average fantasy novel.

Assuring mutual destruction

The “bad bank” concept only appears to have delayed the inevitable default, not prevented it:

It was the failure of Creditanstalt, a Viennese bank founded in 1855 by Anselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America.

No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right?

Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events.

In a nutshell, the Austrian government has had enough of funding the bank’s losses, and announced plans to “bail-in” external creditors to the tune of €7.6bn instead. As such, this marks a test case of new European rules to make creditors pay for failing banks. About time too, you might say. What took them so long?

Only in this case, the bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia.

What the central bankers and politicians are doing is trading risk for time. I, and other economic realists, have been repeatedly wrong about the timing of events; I thought both Greece and Ireland would go bankrupt by 2013. But the fact that the defaults have not begun yet does not mean that the crisis is over, in fact, it does not even mean that the crisis is less serious than before. Quite the opposite, actually.

While I understand if those who don’t pay much attention to international economics might simply assume at this point that I don’t know what I’m talking about because things don’t seem to necessarily be all that bad, it might be helpful to keep in mind that the current situation is unprecedented.

For example, in most previous historical situations, Austria’s Hypo Bank would have gone bankrupt back in 2009. Instead, it was nationalized and put Austrian taxpayers on the hook for up to $25 billion.  The assets were divided and a “bad bank” created, but now that bad bank is in such dire straits that the Austrian government isn’t willing to continue funding its ongoing operational losses. But instead of simply declaring it bankrupt, they have put the assets of the equivalent of a U.S. state behind it.

This may buy them as much as another five years. But it also assures the financial destruction of an entire region of the country. What the banks have successfully done is create a system of mutually-assured destruction, gambling that electorates would rather let them off the hook than risk their governments defaulting, with all the turmoil that would subsequently ensue.

Banking is bad for the economy

It’s amazing that people are talking about how excessive finance and credit money warp the economy to its detriment without ever managing to mention the vital Austrian concept of “malinvestment”. But at least they are starting to talk about it, as it will lead them there eventually.

A new study from the Bank for International Settlements (the central bankers’ central bank, as it is dubbed) shows exactly why rapid finance sector growth is bad for the rest of the economy.

The study, by Stephen Cecchetti and Enisse Kharroubi, is a follow-up to a 2012 paper which outlined the negative link between the finance sector and growth, after a certain point. When an economy is immature and the financial sector is small, then growth of the sector is helpful. Enterprising businessmen can get the capital they need to expand their companies; savers have a secure home for their money, making them more willing to provide finance to the business sector; and so on.

But you can have too much of a good thing. The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.

The new paper examines why this might be. One part of the thesis is a familiar complaint, neatly summarised in the 2012 paper

people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers

In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.

I’m reading the paper now, and will review it once I’ve finished digesting it.