How Bank Depositors Have Become Unsecured Creditors

Bank definition in the dictionary
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The news item tripping everyone up was that a Portuguese bank announced it was delaying coupon payments on short-term debt securities. This revived, for a brief moment, fears of wider European banking problems. It also may have reminded people that most of the world’s debt problems have merely been re-financed to mature at a later date.

In Europe, Portugal’s Banco Espirito Sante cited ‘ongoing material difficulties’. It’s a subsidiary of Portugal’s second-largest lender, Espirito Santo Financila Group. The markets reacted negatively because this is how systemic problems have started in the past. A single firm gets in trouble. Then it spreads.

After opening down, US stocks quickly shrugged off worries of the dreaded ‘C’ word (contagion). We’ll see how it goes. But two quick points on the bank issue. Pay attention if you value your savings.

First, most holders of bank debt have a claim on the liquidated assets of a bank in a wind up. The fact that the bank missed a coupon payment on some of its debt securities should be a reminder to shareholders that equity is last in line in a wind up. Your equity entitles you to a piece of the firm’s earnings. But past that, good luck. It’s all risk and no security.

The other banking note is ominous. Not two days ago, Germany’s federal cabinet adopted a plan that forces owners and creditors to prop up troubled banks ahead of taxpayers. It’s adopted the new rules a year ahead of schedule. The stated goals are to prevent one failed bank from causing ‘systemic’ risk and to save taxpayers the cost of bailing out or recapitalising systemically important banks.

A ‘bail in’ by any other name would smell as much like rotting barramundi in your bedroom on a hot summer’s day. I have no problem with bank creditors being forced to pay for the recapitalising of a firm. That’s the risk you take as a creditor. Equity holders would also pay, inasmuch as that they’re in the hierarchy of creditors.

The problem with the way the ‘bail in’ is being unleashed on the public is that most depositors in major banks don’t see themselves as unsecured creditors to the bank. That’s exactly what they are, though. Thus, it may not be clear to ordinary bank depositors that when ‘bail in’ legislation is adopted in your country, it means your savings could be confiscated to recapitalise a bank that’s taken big losses on bad loans. See also, Cyprus.

No one has been able to show me that Aussie bank depositors aren’t also considered unsecured creditors to the bank in which their savings are held. Is a ‘bail in’ scenario here, where some percentage of your savings are confiscated, possible?

Well, you’d have to have a major bank take massive losses. And the only way that could happen is if the housing market crashed, or a bank had major exposure to a property crash in, say, New Zealand or the UK. Clearly none of those things is possible (ahem).

And in any case, should an Australian bank ever get into serious trouble, you can imagine the government and the Reserve Bank of Australia would step in to prop it up. They’d be doing it with taxpayer money or newly printed money. You would suffer indirectly through a ‘levy’ or through devaluation of the currency. But they’d do it anyway. Because financial interests drive public policy in the Western world.

Speaking of Germany, though, wasn’t that a strange time to bring-forward bail-in legislation? Why now? Coincidence? Plan? Hmm. You decide.

Regards,

Dan Denning
for The Daily Reckoning Australia

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Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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4 Comments on "How Bank Depositors Have Become Unsecured Creditors"

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Jason
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The debt levels are now so high that servicing these debts is becoming increasingly difficult. Like cancer turning malignant the debt levels are also becoming malignant. The Portuguese bank will probably get a hand out from the EU via the ‘magical money making printer’ but it again shows more proof the fiat currency system and the ideology of perpetual growth is reaching its end game.

slewie the pi-rat
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“The problem with the way the ‘bail in’ is being unleashed on the public is that…” unleashed on the public, eh? but…but… Cyprus was “bailed in” well over a year ago, at which time it was obvious to most normal observers that this “bail-in” had become a “template” for troubled EU bankstering… …and… Germany’s Merkel called the shots on the Cyprus “bail-in”, too… …and… the US has had this “on the books” since mid-2010. it is part of the Dodd/Frank Law, which pundits seem to be paid to not understand, for FOUR years, now… unleashed, my fanny! ergo, imo, Germany… Read more »
Harquebus
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The transition from oil fueled growth to debt fueled growth was always going to end badly. The hope of a technological miracle just hasn’t happened and isn’t likely to.

Ross
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The fear grows among these bond debtvestors, most with only smoke for collateral, as the pain spreads. Their lackeys in the judiciary and political parties will be too late in cutting them free. The can kicking and the patterned penny lane tunes will ultimately fail… such being the way of all empires. “Bond investors in the U.S. have long opposed municipal bankruptcies, preferring to restructure debts outside of court, where a judge can impose cuts.” http://www.bloomberg.com/news/2014-07-09/puerto-rico-representative-explores-bankruptcy-option.html At what point do these bad dysfunctional cities and states like Detroit and the Ukraine become not “otherly” like them but more like us?… Read more »
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