Think Your Savings are Safe? Think Again.
|October 26, 2013||Posted by Staff under Financial, The Progress Report|
EU finance ministers 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.
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.
While the insured depositors escaped in Cyprus, they might not fare so well in a bank collapse of the sort seen in 2008-09. 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?
[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.
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, as of June 30, 2011, every $10,000 in deposits was protected by only $6 in reserves. Derivatives claims have “super-priority” in bankruptcy, meaning they take before all other claims. In the event of a major derivatives bust at JPMorgan Chase or Bank of America, both of which hold derivatives with notional values exceeding $70 trillion, the collateral is liable to be gone before either the FDIC or the other “secured” depositors (including state and local governments) get to the front of the line.
Nationalization of bankrupt, systemically-important banks is not a new idea. It was done very successfully, for example, in Norway and Sweden in the 1990s. Real nationalization occurs when governments act in the public interest. The Treasury would become the source of new money, replacing commercial bank credit.