BRRB rules and Banking Act 2016 BofE resolution and bail-in

ColdIron

bail-in wrote: »

Sorry, added Reaper to spam by mistake, whatever that does.

Simply press the spam button again

I hope you have not been reporting other people who have responded to this thread not 'by mistake'?

badger09

Press the Quote button underneath the post to which you want to reply, then type your reply in the blank space below.

Re paragraphs - just pressing the 'return' key on your keyboard would at least give potential readers the chance to draw breath;)

Reaper

bail-in wrote: »

I understand bank savers to be unsecured creditors

That's a good point. I believe they are thinking of bond holders, PIBS, suppliers etc as creditors rather than savers but you are technically correct.

By the way in my list of reasons why savers would not be targeted I missed off another important point - savers have to have faith that their money is safe. As you probably know banks operate using the "fraction reserves banking" system. If you deposit £1 the bank will lend out many times that amount. When you ask for your £1 back they have to recover it from their limited liquid reserves. If everybody asks for their money back at the same time the bank goes bankrupt. At the time of the last crash banks were holding just 1% of their assets in cash.

The government realised the panic queues outside Northern Rock could easily have become an all out run on the banks.

They didn't just raise the compensation limits and refund savers 100% of lost savings to keep people happy, they did it to maintain faith in the banking system without which the whole economy would collapse.

If it ever happens again they couldn't afford to let savers lose money they thought was safe for the same reason. So even if pinching savers money is possible in theory it cannot be allowed to happen in practice.

Malthusian

Reaper wrote: »

As you probably know banks operate using the "fraction reserves banking" system. If you deposit £1 the bank will lend out many times that amount.

No, that's not correct, stop reading positivemoney.org. When you deposit £1 the bank lends out a fraction of that amount, hence "fractional reserve banking". Because they don't have all of your £1 any more, if you ask for the whole £1 back they have to find it somewhere else. So the rest of your post is correct.

Lending out more than you actually own is gearing, not fractional reserve banking.

Uxb

I also concur with @Reaper that in 2008 such was the febrile atmostphere in rhe UK it was essential to silently guaranteed 100% of deposits.
Hence N.Rock was nationalized.
B&B was split up with the savings arm being given to Santander
Kauphing Edge was forcibly closed by the Government and the savings arm given to ING.

The other thing most people fail to appreciate is that the retail deposits in a bank are small fry compared to the corporate deposits which are simply vast.
So companies like Shell, Virgin, the supermarkets, the Credit card companies, BT etc would in effect go bankrupt overnight if their large deposits were bailed in and their banks accounts frozen. The UK would revert back to barter in a matter of days.
So as @Reaper say - it cannot be allowed to happen short of course of full government/state failure


I believe in Euro land there has been more of a tradition in selling true bonds and pibs to retail savers rather than our so called bond account which are simply fixed rate savings accounts. So in Euro land retail "depositor" who are actually in reality often bond rather than depositors may be more at risk.

Anyway, I suggest the OP goes and asks Spain?
Why?
Two days ago the unfortunately named Banco Popular closed its doors and was compulsorily taken over by Santander for a nominal Euro 1.
You will gather from this that it was not popular and has suffered a liquidity crisis recently - that's a bank run in eurospeak.
It lost £3.6bn of deposit withdrawals in two days.
So Spain is having a real example of a bail in conducted at this very moment. I have no idea of the details of how it is being done and who is going to be loosing - apart from bondholders and shareholders who get nowt.

Reaper

Malthusian wrote: »

When you deposit £1 the bank lends out a fraction of that amount, hence "fractional reserve banking".

That's not my understanding. According to Investopedia and Wikipedia

Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal.

However I accept "geared" would be a better term for what I was describing.

Malthusian

Yes, that's what I said. If a bank takes £1 from you, and then lends 80p to a mortgage borrower, only a fraction of the bank deposits (£1) are backed by actual cash on hand (20p).

You said that banks lend many times the deposit (i.e. that banks take £1 from you and then lend out £2 or £5 to a mortgage borrower) which is not correct.

Reaper

I see your point. However the money that the bank lends out comes back to them (eg they lend it to a house builder who buys bricks and the brick company put the money in their bank account). The bank lends that out again and so on, multiplying the effect.

Malthusian

Reaper wrote: »

I see your point. However the money that the bank lends out comes back to them (eg they lend it to a house builder who buys bricks and the brick company put the money in their bank account). The bank lends that out again and so on, multiplying the effect.

It's still the same £1. If the brick company wants its deposit back the bank will have to call in the new loan (or borrow against it or raise liquidity some other way). The £1 thus passes back from the new debtor to the bank and back to the brick company.

Meanwhile the £1 worth of bricks will be made into £1 worth of house, the housebuilder turns the £1 worth of house into £1 worth of money (by selling it), and the original £1 flows from the housebuilder to the bank (loan repayment) and from there back to the original depositor (withdrawal of deposit).

Ignoring interest and the value added by the housebuilder's and the brick company's labour, nothing is being multiplied here, only moved. There is £1 worth of money and £1 worth of bricks in this system and all they do is flow from one place to another.

The Positivemoney.org fallacy is to assert that if I loan £10 to Joe, Joe has £10 in his pocket and I have an asset worth £10 (Joe's debt) so my mysterious Shylockian wizardry has multiplied £10 into £20. This is, of course, balls. In this closed system, I cannot spend my £10 unless I call in my loan to Joe, so the £10 passes from Joe back to me and thence whatever I want to spend it on. There is £10 in cash, an asset worth £10 and a liability worth minus £10 so it's the same £10.