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Tuesday, March 26, 2013 12:01 PM

EU Pushes Bail-In Regulations on All Deposits Above €100,000; Run on Banks Coming Up?

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Cyprus was such a "success", EU to push for losses on big savers at failed banks.

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.

Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalize themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line.

The law, which will also introduce means to impose losses on bondholders, is due to take effect at the start of 2015. Germany wants provisions for bailing in bondholders and others in the same year, though that may be delayed.

Hokmark urged savers to check their banks' health before taking the risk of depositing money.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said. "You need to be aware that you are taking a risk.
Step in Right Direction

Such regulation is a step in the right direction actually. There should be no deposit guarantees at all, no bondholder guarantees, and people should have to pay attention to where they put their money.

For a detailed explanation, please see Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand?

Here are the key ideas from the article

Five Key Points

  1. In a Fractional Reserve Lending scheme, the notion there are meaningful reserves is ridiculous
  2. Far more money has been lent out than really exists (the rest is a fictional accounting entry)
  3. Fractional reserve lending constitutes fraud (just as lending something you do not own is fraud)
  4. There is no way for all this money to be paid back (so it won't be)
  5. Of all the central banks, the Reserve Bank of New Zealand has the most sensible policy for the most sensible reasons of all the central banks.

That said, note how bondholders and the ECB have been protected so far.

Bondholders did not suffer losses on Irish bonds, and the ECB did not even take a hit on its Greek bonds. Cyprus bondholders were not protected, primarily because the big European banks were not involved so they had nothing to lose.

Run on Banks Coming Up?

Looking ahead, the implication is that no one should place more than €100,000 in any bank. So no one will, especially in questionable Southern European banks. Instead, expect capital flight to presumed "too big to fail" Northern European banks, and also expect people to park more money directly at the ECB, where it will be safe.

Might such legislation then, spur a run on banks? Seems that way to me. My advice for European depositors is simple "Please don't wait until 2015 to find out."

Mike "Mish" Shedlock

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