Money on Deposit is no Longer Your Money

Money on Deposit is no Longer Your Money

Published on 26/01/2015

Following the recent G20 meeting, large deposits held at banks will not be your money but rather it will become part of a bank’s capital structure. In the event of a government “bailout” for a “failing” [Nb. not “failed”] bank, they will now have a “bail-in” in which your money held on deposit will now be a creditor of the bank. Large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank. This now means that investors should now prefer to hold bank notes as opposed to putting money on deposit. Because deposits will not be “money” in a failing bank but bank notes will be [bank notes cannot be written down or given a “haircut”].
Could this precipitate a run on a bank, we ask? Rather than reining in the massive and risky derivatives casino, the new rules prioritise the payment of banks’ derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called “bail-inable” bonds. “Bail-in” has been sold as avoiding future government bailouts and eliminating too big to fail (TBTF). But it actually institutionalises TBTF, since the big banks are kept in business by expropriating the funds of their creditors. It is a neat solution for bankers and politicians, who don’t want to have to deal with another messy banking crisis and are happy to see it disposed of by statute. But a bail-in could have worse consequences than a bailout for the public.
If your taxes go up, you will probably still be able to pay the bills. If your bank account or pension gets wiped out, you could wind up in the street or sharing food with your pets.
The consultation document from the UK’s Treasury lists the following bank creditors who will rank ABOVE depositors in a ‘failing’ financial institution:

• Liabilities representing protected deposits (in the UK the government guarantee protects 100% of deposits up to the value of £85K
• Any liability, so far as it is secured
• Liabilities that the bank has by virtue of holding client assets • Liabilities arising with an original maturity of less than 7 days owed by the banks to a credit institution or investment firm
• Liabilities owed to central counter parties recognized by the European Securities and Markets Authorities… on OTC derivatives, central counterparties and trade depositaries
• Liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration
• Liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits
• Liabilities owed to creditors arising from the provision to the bank of goods or service (other than financial services) that are critical to the daily functioning of its operations.
The above list makes it clear that deposits larger than £85K will rank ahead of the bond holders of banks, but they will rank above little else.

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