Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins
Posted on March 29, 2014 by Ellen Brown
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
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“As things stand, the banks are the permanent government of the country, whichever party is in power.”
Lord Skidelsky, House of Lords, UK Parliament, 31 March 2011)
On March 20, 2014, European Union officials reached an historic agreement to create a single agency to handle failing banks. Media attention has focused on the agreement involving the single resolution mechanism (SRM), a uniform system for closing failed banks. But the real story for taxpayers and depositors is the heightened threat to their pocketbooks of a deal that now authorizes both bailouts and “bail-ins” – the confiscation of depositor funds. The deal involves multiple concessions to different countries and may be illegal under the rules of the EU Parliament; but it is being rushed through to lock taxpayer and depositor liability into place before the dire state of Eurozone banks is exposed.
The bail-in provisions were agreed to last summer. According to Bruno Waterfield, writing in the UK Telegraph in June 2013:
Under the deal, after 2018 bank shareholders will be first in line for assuming the losses of a failed bank before bondholders and certain large depositors. Insured deposits under £85,000 (€100,000) are exempt and, with specific exemptions, uninsured deposits of individuals and small companies are given preferred status in the bail-in pecking order for taking losses . . . Under the deal all unsecured bondholders must be hit for losses before a bank can be eligible to receive capital injections directly from the ESM, with no retrospective use of the fund before 2018.
As noted in my earlier articles, the ESM (European Stability Mechanism) imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the Eurocrats (EU officials) demand. And it’s not just the EU that has bail-in plans for their troubled too-big-to-fail banks. It is also the US, UK, Canada, Australia, New Zealand and other G20 nations. Recall that a depositor is an unsecured creditor of a bank. When you deposit money in a bank, the bank “owns” the money and you have an IOU or promise to pay.
Under the new EU banking union, before the taxpayer-financed single resolution fund can be deployed, shareholders and depositors will be “bailed in” for a significant portion of the losses. The bankers thus win both ways: they can tap up the taxpayers’ money and the depositors’ money.
The Unsettled Question of Deposit Insurance
But at least, you may say, it’s only the uninsured deposits that are at risk (those over €100,000—about $137,000). Right?
Not necessarily. According to ABC News, “Thursday’s result is a compromise that differs from the original banking union idea put forward in 2012. The original proposals had a third pillar, Europe-wide deposit insurance. But that idea has stalled.”
European Central Bank President Mario Draghi, speaking before the March 20th meeting in the Belgian capital, hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place” – two but not the third. And two are not enough to protect the public.As observed in The Economist in June 2013, without Europe-wide deposit insurance, the banking union is a failure:
[T]he third pillar, sadly ignored, [is] a joint deposit-guarantee scheme in which the costs of making insured depositors whole are shared among euro-zone members. Annual contributions from banks should cover depositors in normal years, but they cannot credibly protect the system in meltdown (America’s prefunded scheme would cover a mere 1.35% of insured deposits). Any deposit-insurance scheme must have recourse to government backing. . . . [T]he banking union—and thus the euro—will make little sense without it.
All deposits could be at risk in a meltdown. But how likely is that?
Pretty likely, it seems . . . .
What the Eurocrats Don’t Want You to Know
Mario Draghi was vice president of Goldman Sachs Europe before he became president of the ECB. He had a major hand in shaping the banking union. And according to Wolf Richter, writing in October 2013, the goal of Draghi and other Eurocrats is to lock taxpayer and depositor liability in place before the panic button is hit over the extreme vulnerability of Eurozone banks:
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