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Dave Kranzler
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I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock... More
My company:
Golden Returns Capital
My blog:
Investment Research Dynamics
  • The Frightening Truth About Cyprus: The "Bail-In" Model Was Implemented As Planned 1 comment
    Apr 3, 2013 3:36 PM

    "If there is a risk in a bank, our first question should be: 'Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders. We'll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: 'What can you do in order to save your own banks?'" - Jeroen Dijsselbloem, March 26, 2013 (bold edit is mine, I sourced this quote here: Caveat Depositor)

    That statement - and specifically the phrase used in bold - is directly taken from a global banking agreement for bank rescues that was ratified in 2011 by the G20 members (further elaborated below). Although the U.S. media is not reporting this fact, it is extremely important to know so that you can take the necessary pre-cautions to protect your money.

    Like everyone else, when I saw the first reports that bank depositors in Cyprus banks where going to take a loss on their bank deposits, I was in shock and disbelief. At first it was all depositors, but as the situation unfolded, the deal - known as a "bail-in," was restructured to protect depositors up to their Government insured deposit amount of 100,000 euros. The amount of loss that will be suffered by deposits in excess of 100k euros has not been solidified, but the latest reports suggest it could be as high as 60%.

    What most people do not realize is that when you deposit your money in any bank, from an accounting and legal standpoint, you are loaning the use of that money to the bank. In other words, you become a creditor to that bank. Look at any bank balance sheet and you'll see that "deposits" are listed in the "Liability" section of the balance sheet. Defined as such, it means that as a bank depositor, you are exposing yourself to the ability of the bank to give you back your money when you want it. The bank is your legal counter-party.

    The only reason people believe that their money is completely safe in a bank is the existence of Government-sponsored deposit insurance. The only difference between what is happening in Cyprus now and what happened in the U.S. in 2008 is that the U.S. has the ability to print its own currency in order to bailout the banks and fund depositor insurance. Cyprus is dependent on the ECB to make that decision.

    In addition to printing money, the big bank bailouts in this country and in Europe were funded by the taxpayers. That's exactly what TARP is and, most people are unaware of this, but the Treasury (i.e. the taxpayers) placed a guarantee on a significant portion of the assets the Fed assumed from banks in exchange for providing immediate liquidity. If these measures were not implemented, it is likely that U.S. bank depositors would have suffered the same fate as their Cypriot counter-parts.

    Because the use of taxpayer-funded bailouts would likely no longer be tolerated by the public, a new bank rescue plan was needed. As it turns out, this new "bail-in" model is based on an agreement that was the result of a bank bail-out model that was drafted by a sub-committee of the BIS (Bank for International Settlement) and endorsed at a G20 summit in 2011. For those of you who don't know, the BIS is the global "Central Bank" of Central Banks. As such it is the world's most powerful financial institution. I sourced a copy of this Agreement here: Danger in Bank Accounts.

    I read through the Agreement and was quite stunned by the terms of the agreement and also by the implications for any bank depositor in any country. The bank rescue model lays out a complete, systematic procedure for the rescuing and restructuring of any institution that is considered a "SIFI" - a Systematically Important Financial Institution. Here is a link to the Agreement: Financial Stability Board Rescue Model

    The Preamble specifically states:

    The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.

    As you can see the agreement references specifically avoiding more taxpayer bailouts. It also refers to bank deposits in excess of Government insured amounts as "uninsured creditors." This is essentially the standard legal bankruptcy model which uses creditor hierarchy (secured lenders, unsecured lenders, preferred equity, equity) and applies to the rescuing of banks.

    This is very important to know about and understand because what is commonly referred to as a "bail-in" in Cyprus is actually a global bank rescue model that was derived and ratified nearly two years ago. It also means that bank deposits in excess of Government insured amounts in any bank in any country will be treated like unsecured debt if the bank goes belly-up and is restructured in some form.

    Because this is a legal Central Banking agreement that will be applied globally, it also means that U.S. bank depositors will not be immune to this rescue mechanism. It means that no one should keep any amount in any bank that exceeds the FDIC guarantee. In fact, I would recommend only keeping enough money in the bank to fund your monthly or quarterly bill paying requirements. Any amount in excess of FDIC deposit insurance will be exposed to the risk bankruptcy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: economy
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  • Polyvios Petropoulos
    , contributor
    Comments (32) | Send Message
     
    Can anyone explain what happens if most of a deposit account over 100000 euros is not cash but mutual funds and other third-party investments. Example: Say, a 500000 euro deposit account in Cyprus Laiki Bank, which is now bankrupt, consists of 150000 in cash and 350000 in third-party international mutual funds. What will be confiscated and what will be returned to the depositor? Can they confiscate mutual funds such as Barclay’s, Pimco’s, etc? How can they liquidate them without the owner’s permission or authorisation? So, I would guess that 100000 are guaranteed and saved, 50000 are confiscated, and the funds are returned to their owner, the depositor. Is this correct?

     

    Pls let me know when and where I can read your answer.

     

    Thanks.

     

    P. Petro
    10 Apr 2013, 07:55 AM Reply Like
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