The Irish Times writes today that EU finance ministers have agreed a set of rules that could be used to wind up insolvent banks. In future, banks creditors – including potentially savers – would suffer losses should European financial institutions collapse. That comes after Irish Minister for Finance Michael Noonan said “Bail-in is now the rule” back in June of this year.
Bank bail-ins, or deposit confiscation, are the opposite of bail-outs. Instead of the government stepping in to bail-out a bank when it defaults, it is a group of stakeholders (including deposit holders of the bank) that are paying for the default. Deposit owners, including savings account owners, risk to lose part or everything of the money they hold on their deposit(s) at the bank.
In A Closer Look At Bank Bail-Ins And The Black Hole Of Our System we explained that Cyprus was the test of the bail-in model. Besides, the IMF had been researching a super tax on savings in Europe lately.
GoldCore comments on the news about the European bail-in agreement:
The toolkit underpinning the Single Resolution Mechanism is provided for in the bank recovery and resolution proposal (BRR) which was agreed last June in Council under the Irish Presidency. The proposal provides a common framework of rules and powers to help EU countries manage arrangements to deal with failing banks at national level as well as cross-border banks, whilst preserving essential bank operations and minimising taxpayers’ exposure to losses.
One of the main pillars to the BRR framework to facilitate a range of actions by authorities are “resolution tools”. Noonan confirmed yesterday that resolution tools include the sale of business, bridge bank and asset separation tools and also the use of bailins.
The era of bondholder bailouts is ending and that of depositor bail-ins is coming.
Most people are unaware of bail-ins. Besides, the consequences are more negative than many realise. “Were bail-ins to occur, they would badly affect the remaining wealth of the already hard- pressed middle classes, of entrepreneurs and the SME sector. Consumer and business confidence would likely suffer, bringing attendant consequences in the economy. A policy of bail-ins in one European economy could lead to a series of mini- runs on financial systems all over Europe, especially should a pillar bank report poor earnings or a government miss a fiscal target. Rather than calm nerves, a policy of bail-in may well be a Pandora’s box of unexpected economic risk.” says The Irish Times.
Meantime, paradoxically, one of the smallest countries in the Eurozone, Belgium, is working towards a bank savings account guarantee. The financial site Tijd.be writes that the government is working on a proposal to provide 100% guarantee on all savings accounts in Belgian banks. Their proposal stipulates that banks carry the risk and responsibility of the guarantee. Obviously, there is dissatisfaction about the proposal among the local banking industry. Will Belgium become the European savers’ safe haven?