*BREAKING SD ALERT*
On Wednesday, SD broke the news that Canada had buried a provision for depositor bail-ins for systemically important banks deep inside its official 2013 budget, and stated that theCypriot bail-in was not just a one-off event, but is in fact the new collapse template for the entire Western banking system.
We suspected that the same policy change had been made by the US & the UK, but was simply yet to be discovered, buried in the website of a Federal agency.
We suspected correctly…
In the introduction, the resolution informs readers that the FDIC and the Bank of England have been working together to formulate the new bail-in model for future bank failures:
The joint US/UK resolution states that depositor haircuts are already legal in the UK thanks to the 2009 UK Banking Act:
And that the legal authority has already been given in the US buried in Dodd-Frank:
The resolution states that while the US would prefer large financial institutions be resolved through ordinary bankruptcy, depositor wealth confiscation will be pursued in the case of a systemically important institution (i.e. BOA, JPMorgan, Goldman Sachs, etc):
financial organizations be resolvable through ordinary bankruptcy. However, the U.S. bankruptcy process may not be able to handle the failure of a systemic financial institution without significant disruption to the financial system.
The resolution authority states that shareholders would lose all value prior to depositor scalpings:
Under both the U.S. and U.K. approaches, legal safeguards ensure that creditors recover no less than they would under insolvency.
The banksters plans for a bail-in resolution agency include investment banks and clearing houses as well as deposit bearing institutions!!!
enable the resolution authority to impose a temporary stay on the exercise of termination rights by counterparties in the event of a firm’s entry into resolution (in other words, preventing counterparties from terminating their contractual arrangements with a firm solely as a result of the firm’s entry into resolution) will be needed to ensure the bail-in is executed in an orderly manner.
The existing Banking Act does not cover nondeposit-taking financial firms, notably investment banks and financial market infrastructures (clearing houses in particular), the failure of which, in many cases, would also have significant financial stability consequences. The Banking Act also has limitations with regard to the application of resolution tools to financial holding companies. The U.K. is in the process of expanding the scope of the Banking Act to include these firms. This is expected to be achieved through the introduction of the U.K. Financial Services Bill, which is due to complete its passage through Parliament by the end of this year.
Exactly as played out with the Cyprus template, depositors will receive equity shares in the new, bailed-in institution:
The remaining claims of the debt holders will be converted, in part, into equity claims that will serve to capitalize the new operations. The debt holders may also receive convertible subordinated debt in the new operations. This debt would provide a cushion against further losses in the firm, as it can be converted into equity if needed. Any
remaining claims of the debt holders could be transferred to the new operations in the form of new unsecured debt.
Exactly as played out with the Cyprus template, depositor funds will be stolen in whatever quantities are required to keep the TBTF zombie bank afloat:
Once the recapitalization requirement has been determined, an announcement of the final terms of the bail-in would be made to the previous security holders.
This announcement would include full details of the write-down and/or conversion.
Debt securities would be cancelled or written down in order to return the firm to solvency by reducing the level of outstanding liabilities. The losses would be applied up the firm’s capital structure in a process that respects the existing creditor hierarchy underinsolvency law. The value of any loans from the parent to its operating subsidiaries would be written down in a manner that ensures that the subsidiaries remain solvent and viable.
For now (until the rules are changed when a greater need for funds arises, funds will only be stolen from depositors with more than the FDIC insured $100,000 in their account:
Insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation.
Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.
In order for the resolution to work, the banksters state that the public must be convinced their deposits are safe, when in fact they are subject to bail-in confiscation:
Similarly, because the group remains solvent, retail or corporate depositors should not have an incentive to “run” from the firm under resolution insofar as their banking
arrangements, transacted at the operating company level, remain unaffected. In order to achieve this, the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.
0.1% interest on savings deposits with the now VERY REAL THREAT OF COMPLETE CONFISCATION in the US & UK doesn’t sound like such a great return to us.
The Fed appears to be making a calculated play to force savings out of the TBTF banks and into stocks and real estate, a move that is likely to backfire spectacularly.