Understanding bank bail-ins

[imoldernu]

I am not sure how I came upon this article, except that it probably had to do with the situation in Greek banks.

As I read it, should a bank go under, a savings account held in that bank, could be at risk for the depositor, before federal funds would be dispersed. Since this sounds so incredible, perhaps someone here could explain this. Is it true? If so, why, in the case of a market in turmoil, would anyone trust money to a bank?

The Bail-In: How You and Your Money Will Be Parted During the Next Banking Crisis

While the FDIC guarantees $250,000, the secondary question is that of the bank's derivative holdings, which could well exceed the assets of the FDIC.

Simple. When you deposit money in a checking or savings account, that money no longer belongs to you. Technically and legally, it becomes the property of the bank, and the bank just issues you what amounts to an IOU. As far as the bank is concerned, it’s an unsecured debt.

The way Dodd-Frank has managed to screw things around, derivatives (bets banks have made in the Wall Street casino) have priority over your checking and savings accounts when it comes to paying off their debts. And don’t think that the FDIC (Federal Deposit Insurance Corporation) will save your money. The assets of the FDIC are minuscule (in the billions) compared to the valuation of outstanding derivatives (in the trillions). Your deposits are protected only up to the $250,000 insurance limit, and also only to the extent that the FDIC has the money to cover deposit claims or can come up with it.

 

[pb4uski]

Methinks they don't understand derivatives. What does notional value have to do with it? Plus, others can comment on banking, but I know in insurance there are strict rules and regulations covering derivatives trading. anybody can have a blog whether they have a clue or not.

Ellen Brown asks, “What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depositary arms, is propelled into bankruptcy by a major derivatives fiasco? These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world.”

 

[MichaelB]

As I read it, should a bank go under, a savings account held in that bank, could be at risk for the depositor, before federal funds would be dispersed. Since this sounds so incredible, perhaps someone here could explain this. Is it true? If so, why, in the case of a market in turmoil, would anyone trust money to a bank?

That link is tarradiddle and codswallop.

 

[pb4uski]

with a generous scoop of balderdash too.

 

[Big_Hitter]

and a few horsefeathers

 

[Bestwifeever]

You find the most intriguing websites, Imoldern.

I think I will leave our money where it is.

 

[jim584672]

Now you know why they want to ban physical cash. Lock people into the banks with no way to "run" on them before the bail in.

 

[Golden sunsets]

The full faith and credit of the U.S. Treasury is de facto behind the FDIC fund. If and when the FDIC doesn't honor deposits up to $250,000 in the next crisis we may as well pack it in and all go home.

 

[Danmar]

The full faith and credit of the U.S. Treasury is de facto behind the FDIC fund. If and when the FDIC doesn't honor deposits up to $250,000 in the next crisis we may as well pack it in and all go home.

Agree. Blogger has not a clue. In Canada we now have a class of bank preferred shares which will convert to common if the bank runs into big trouble. But deposits always rank ahead of all other bank debts. In some bank crises (Cyprus) depositors were forced to take a hair cut but this was mostly to get back at large Russian depositors.

 

[imoldernu]

While I don't question the wisdom of those who feel the risk is overstated, keeping in touch with contrary views cannot be harmful, even if posited by crazies or gold bugs. The subject exists. Understanding why it is unlikely, is just as important as believing that the situation could not happen.

Another article...Bail-Ins of Deposits In Greece Would Be "Counter-Productive"

...and this excerpt from the Bloomberg View of July 24...

Greece.

It is still happening! Greece's parliament yesterday approved a bank resolution process that includes the possibility of "bail-ins" from bondholders, though surely if you owned Greek bank bonds before yesterday you were not expecting a 100 percent probability of 100 percent repayment. Christine Lagarde and Angela Merkel are still at odds about Greek (government) debt restructuring, with Lagarde and the IMF in favor and Merkel and Germany reluctant, though surely if you own Greek government bonds you were not expecting a recovery of 100 percent of net present value. George Magnus thinks Grexit is still quite possible. James Surowiecki asks how Greece can take charge of its economy. In other distressed sovereign news, Ukraine made a bond payment, somewhat surprisingly.

 

[meierlde]

The full faith and credit of the U.S. Treasury is de facto behind the FDIC fund. If and when the FDIC doesn't honor deposits up to $250,000 in the next crisis we may as well pack it in and all go home.

In fact that is all that stands behind the currency as well, so if the FDIC fails the currency goes next. Of course Gold is a speculative investment as well (down 50% over 2 years).

 

[MichaelB]

While I don't question the wisdom of those who feel the risk is overstated, keeping in touch with contrary views cannot be harmful, even if posited by crazies or gold bugs. The subject exists. Understanding why it is unlikely, is just as important as believing that the situation could not happen.

Another article...Bail-Ins of Deposits In Greece Would Be "Counter-Productive"

...and this excerpt from the Bloomberg View of July 24...

There's a big difference between a contrarian view and a crazy opinion. Even though I might not agree with the contrarian view, I can still learn from it and it will be based on fact and well reasoned. The link in the first post was neither IMO. I didn't open the second because it looks like a gold bug wrote it, and I do not share their view of the monetary system.

Is your question or concern about FDIC, derivatives, gold, or Greek banks bailout?

 

[pb4uski]

Correct me if I'm wrong, but there would be no such thing as a bail-in in the US... if a bank is insolvent the FDIC steps in, takes the keys, and then either sells the bank to a healthier bank or liquidates it and pays the depositors (who are senior to the subject bank's bondholders or stockholders). Generally, there are regulatory restrictions on investments the bank can make, capital requirements, and the regulatory scheme is such that the FDIC steps in before the value of assets is less than deposits.

 

[Danmar]

Correct me if I'm wrong, but there would be no such thing as a bail-in in the US... if a bank is insolvent the FDIC steps in, takes the keys, and then either sells the bank to a healthier bank or liquidates it and pays the depositors (who are senior to the subject bank's bondholders or stockholders). Generally, there are regulatory restrictions on investments the bank can make, capital requirements, and the regulatory scheme is such that the FDIC steps in before the value of assets is less than deposits.

Agree that this is how it has worked in the past and would work this way again. The term "bail in" relates to the forced conversion of certain classes of bonds, pref shares, or possibly even deposits in the case of a bank running into trouble. This is designed to relieve the gov't authority of having to "bail out" the bank. The U.S. does not have a bail in regime at this point. Other countries like Canada have such a bail in system.

 

[Gatordoc50]

Essentially, there hasn't been any change in the way banks do business. There were provisions passed to supposedly let taxpayers off the hook in case of a collapse but much of those were reversed in the Cromnibus bill. It is true that in a failure your deposits can be paid out to creditors. The FDIC insures those losses up to 250k. If there was a massive failure, the FDIC could not make good on its promise without resorting to printing or bail ins. In other words, no different than what happened in 08.

 

[Golden sunsets]

"Too big to fail" is still an issue. The Treasury Dept and the Fed kept us from dropping off a cliff in the last crisis. As a former FDIC examiner I can attest to the fact that most banks are solvent and well managed. The crisis of 2008 occurred for a number of reasons, one of which was derivative activities of unregulated non-banks such as AIG. The deregulation of the banking industry started the slippery slope that escalated into the crises we faced in 2008.

 

[Another Reader]

The Greeks seem to understand the concept of the bail-in rather well....


https://finance.yahoo.com/news/greek-pm-tsipras-under-pressure-141355344.html

 

[MichaelB]

The Greeks seem to understand the concept of the bail-in rather well....


https://finance.yahoo.com/news/greek-pm-tsipras-under-pressure-141355344.html

A summary or snippet to the link would be helpful to other members.

 

[Another Reader]

It's a short article. Lots of intrigue drifting out from smoke (or ouzo) filled back rooms during the crisis. Especially amusing was the plan to arrest the president of the Bank of Greece if he opposed emptying the vaults. We all have heard of Greek tragedy. But Greek comedy?

 

[MichaelB]

It's a short article. Lots of intrigue drifting out from smoke (or ouzo) filled back rooms during the crisis. Especially amusing was the plan to arrest the president of the Bank of Greece if he opposed emptying the vaults. We all have heard of Greek tragedy. But Greek comedy?

Thank you. A snippet from the article

It is not clear how seriously the plans, attributed to former Energy Minister Panagiotis Lafazanis and former Finance Minister Yanis Varoufakis, were considered by the government and both ministers were sacked earlier this month.

 

[meierlde]

Agree that this is how it has worked in the past and would work this way again. The term "bail in" relates to the forced conversion of certain classes of bonds, pref shares, or possibly even deposits in the case of a bank running into trouble. This is designed to relieve the gov't authority of having to "bail out" the bank. The U.S. does not have a bail in regime at this point. Other countries like Canada have such a bail in system.

If you have uninsured deposits then yes you are subject to bail ins look at Indy Mac or further back Penn Square bank in Ok. In those cases the uninsured depositors got back a percentage of their deposits after the FDIC managed to redeem them. So yes if you have sums above the insurance limits (250 k per depositor noting that pay on death deposits are a distinct deposit for FDIC purposes from deposit in the individuals name alone etc, you will get bailed in.
Or further in the case of Washington Mutual the bond holders of the holding company got wiped out because the FDIC sold the underlying bank out of the holding company leaving it standing with no assets (Geitner did not like this)

 

[RetireBy90]

"Too big to fail" is still an issue. The Treasury Dept and the Fed kept us from dropping off a cliff in the last crisis. As a former FDIC examiner I can attest to the fact that most banks are solvent and well managed. The crisis of 2008 occurred for a number of reasons, one of which was derivative activities of unregulated non-banks such as AIG. The deregulation of the banking industry started the slippery slope that escalated into the crises we faced in 2008.

Perhaps we could first be honest about the causes of the 2008 crisis, and then perhaps we could plan to keep the causes from happening again. We have taken banks to the shed, but what about the other causes? We had home buyers that lied on load applications, no outrage against them. We had congress pass laws that required a greater percentage of Fannie and Freddy loans be made to lower income buyers, when did we hold them accountable? Must have missed that one. We had shadow lenders deeply involved in financial system that had no backups. We had appraisals that grossly overvalued homes, now I can't get an honest appraisal.

I don't know all the details, but seems naive to me to think we have rooted out the problems and put any kind of fix in place.

Sorry for rant but I do think it is important to understand the causes.

 

[pb4uski]

......It is true that in a failure your deposits can be paid out to creditors. The FDIC insures those losses up to 250k. ....

I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors.

The category given second priority applies to any deposit liability of the institution, including both the insured depositors and the uninsured depositors.

from: https://www.fdic.gov/bank/historical/managing/history1-10.pdf

 

[meierlde]

I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors.



from: https://www.fdic.gov/bank/historical/managing/history1-10.pdf

One must consider the corporate structure often there is a holding company and a seperate corporation the bank. Depositors are creditors of the bank subsidiary. Bond holders may be creditors of the holding company or the bank, (for example money market funds may hold holding company paper). The FDIC bails out the bank subsidiary and as in the case of Washington Mutual might just hang the holding company and its creditors out to dry. For example the stock is stock in the holding company, the holding company holds the stock in the bank subsidiary. If you do a bank search at the FDIC site you will find this for the big banks.

 

[Gatordoc50]

I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors.







from: https://www.fdic.gov/bank/historical/managing/history1-10.pdf

I believe that the Bankruptcy Reform Act of 2005 changed that but I am no expert.

" For starters, the FDIC does not have the sole right to prevent BOA or any other Too Big To Fail Bank from using the Bankruptcy Code to prefer payment to derivatives' counter-parties before making FDIC insured depositors whole."

http://www.dailykos.com/story/2011/...ica-s-Derivatives-Transfer-Despite-Dodd-Frank