EU Regulators Order 11 Countries To Adopt Bail-In Rules

If there is a risk in a bank, our first question should be: “Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?” If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: “What can you do in order to save your own banks?” – Jeroen Dijsselbloem, President of the Board of Directors of the European Stability Mechanism, March 26, 2013

The bail-ins are coming. Reuters reported today that European Commission today gave France, Italy and nine other EU countries two months to adopt bank bail-in regulations or face legal action – LINK

The move to require bank bail-ins originated at the BIS – Bank for International Settlements beginning in 2008. In 2011, the Financial Stability Board (FSB) – a sub-committee of the BIS – drafted the boilerplate model for big bank bail-ins: Key Attributes of Effective Resolution Regimes for Financial Institutions.

The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.

The bank rescue model as drafted lays out a complete systematic procedure for the rescuing and restructuring of any financial institution considered “SIFI” – a Systematically Important Financial Institution. In layman terms this translates into “Too Big To Fail.” This model was endorsed by the G20 at Summit in 2011.

The “model” requires that funds required for a bail-in to prevent a TBTF from collapsing would first be taken from unsecured creditors. This is primarily any depositor money in excess of the amount insured by the Government. Incredibly, and this has been ratified by legislation in the United States, holders of derivative securities of the collapsing bank are considered super-secured. In other words, those stakeholders in the banks would be the last to suffer any losses resulting from the restructuring of an insolvent bank.

In the United States there is over $4 trillion in depositor cash in excess of the amount covered by the FDIC sitting in banks.

Make no mistake about this, bail-in legislation is coming to the U.S. In fact, a $1.1 trillion spending Bill passed by Congress and signed by Obama on December 16, 2014 contained specific provisions drafted (and paid for) by Citibank which ensured that big bank OTC derivatives holdings will be covered by the FDIC (i.e. taxpayer). This is a back-door way of making the next taxpayer bailout of the big banks a legal requirement.

Anyone who keeps any cash in a bank is either completely ignorant of the ways in which that money can be “confiscated” or just completely brain-dead. I suppose there could be a strong element of denial involved as well. Big bank balance sheets are in far worse shape than they were in 2008, especially once you peel away all of the accounting shenanigans and include the off-balance-sheet ticking bombs. It’s not a question of “IF” – It’s a question of “WHEN.”

We can ignore reality, but we cannot ignore consequences of ignoring reality. – Ayn Rand