Bank of England and FED publication - Scary

Spiro_Alchemist

Resolving Globally Active, Systemically Important institutions (10th Dec 2012)

Please refer to bankofengland.co.uk website:
publications/Documents/news/2012/nr156 for pdf
(No access to add weblink).

The key points of the report are probably:
1. Future bank bailouts will be funded by shareholders and creditors (including depositors)
2. In the case of a major bank failure, depositors (savers) will be “bailed in” and will either lose part (or all) of their money or else part (or all) of their money will be converted to banks shares in the failed bank
3. A EU directive – the EU Recovery and Resolution Directive – allows insured deposits to be bailed in. In layman’s terms, this means that deposits up to £85,000 in the UK and up to €100,000 in the Eurozone can be used to cover the failed bank’s losses.

Is our money at risk including "safeguarded" 85K under a potential bail-in scenario?

innovate

Spiro_Alchemist wrote: »

1. Future bank bailouts will be funded by shareholders and creditors (including depositors)

That's how it should be, in the main

Spiro_Alchemist wrote: »

2. In the case of a major bank failure, depositors (savers) will be “bailed in” and will either lose part (or all) of their money or else part (or all) of their money will be converted to banks shares in the failed bank

That sounds a bit scary

Spiro_Alchemist wrote: »

3. A EU directive – the EU Recovery and Resolution Directive – allows insured deposits to be bailed in. In layman’s terms, this means that deposits up to £85,000 in the UK and up to €100,000 in the Eurozone can be used to cover the failed bank’s losses.

That sounds very scary, and I hope you have not interpreted this point correctly. I would expect that the bank levy (=insurance policy) will always cover a minimum amount.

We do need to get to a lot tougher stances with banks. So far, I don't think they take it very serious that they need to function like other businesses, and stop gambling with people's money. We also need to get it into the depositors heads that they won't just bailed out again, no conditions imposed.

But I do hope that a shred of fairness prevails and the FSCS guarantee and its equivalents in the EU countries will be kept. The american influence to the study is scary because americans at large have no social conscience and would shoot anyone they declare defenseless - be it on account of wealth, health, mental or physical ability, nationality, or colour of skin.

Masomnia

I'm going to stick my neck out a bit here and say it sounds fair enough to me. I don't see why deposits should be completely safe, and I think asking depositors to swap debt for equity rather than see their savings go down the pan or ask taxpayers to bail them out is a good compromise.

Glen_Clark

They are not going to say we will keep on bailing out the bankers, and their bonuses, with public and savers money, because politicians are looking to get a cushy £million job in a bank (like Blair) when they leave office

StevieJ

innovate wrote: »

But I do hope that a shred of fairness prevails and the FSCS guarantee and its equivalents in the EU countries will be kept. The american influence to the study is scary because americans at large have no social conscience and would shoot anyone they declare defenseless - be it on account of wealth, health, mental or physical ability, nationality, or colour of skin.

Well the first one (in a major economy) that isn't will see mass panic and queues everywhere else. That is why the guarantee exists and will be honoured.

Ark_Welder

Yawn
.......

rb10

Have to admit that I've only skimmed the paper, but I don't think you are correct.

There is a strict hierarchy of what money may be used for bail-in, and in what order. Shareholders and unsecured creditors come first. Depositors come later. But the £85k FSCS limit still applies to all personal account holders.

Are you able to back up any of your claims by referring me to a quote/paragraph number in the document?

moneyfoolish

rb10 wrote: »

But the £85k FSCS limit still applies to all personal account holders.

If it doesn't there will be civil unrest which will make the riots which started in tottenham look small!

kidmugsy

Spiro_Alchemist wrote: »

The key points of the report are probably:
1. Future bank bailouts will be funded by shareholders and creditors (including depositors)
....
3. A EU directive – the EU Recovery and Resolution Directive – allows insured deposits to be bailed in. In layman’s terms, this means that deposits up to £85,000 in the UK and up to €100,000 in the Eurozone can be used to cover the failed bank’s losses.

Who else but the shareholders and then the creditors should end up paying? There's no sense, however, in putting the £85k deposits at risk because that would negate the whole point of a deposit guarantee i.e. the avoidance of bank runs.

moneyfoolish

kidmugsy wrote: »

Who else but the shareholders and then the creditors should end up paying? There's no sense, however, in putting the £85k deposits at risk because that would negate the whole point of a deposit guarantee i.e. the avoidance of bank runs.

Exactly! If we buy shares, we know we can lose everything in the pursuit of higher profits. The more cautious put money into bank accounts precisely because they don't want to lose it - even though most know it's currently being eroded!

innovate

StevieJ wrote: »

Well the first one (in a major economy) that isn't will see mass panic and queues everywhere else.

You could of course argue that this doesn't matter and the public panic and protest will all be over in a few days or weeks. It was in Cyprus.