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 s tatement 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
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
s till 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.
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