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Think Your Money is Safe in an Insured Bank Account? Think Again.

A trend to shift responsibility for bank losses onto blameless depositors lets banks gamble away your money.
 
 
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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 statement 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 still 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?