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Must Read For People Who Have Bank Accounts

Posted by Wendell Brock, MBA, ChFC on Thu, Apr 21, 2016

Last week I posted this article on my other blog Outside Economics and many people enjoyed reading the article. I thought I would repost it here so you would have the latest on what is going on in Europe and what could happen here in the U.S.. If you like the article please subscribe to Outside Econoimics for future great articles and make a comment below. Thank you.

The great recession has left its mark on many of us in so many ways it is hard to understand them all - perhaps similar for generations before with the Great Depression. One major mark is in banking. The Great Depression produced the FDIC which insured customer deposits and help provide a level of financial security to the banking system. Now Europe and the European Union has lead the way with a “bail-in” concept where depositor bank accounts are used to shore up the troubled bank, thus taking the tax payers off the hook for failed banks. 

This week Austria put this to the test. Hypo Alpe Adria (HETA) collapsed under the weight of bad loans. The bank is located in the Province of Cimages.jpgarinthia, which has mostly controlled the bank for the past year, when it first started having problems. In taking on the obligation of this bank Carinthia is worried that it may cause the Province to file for bankruptcy as well.

The Austrian Financial Market Authority (FMA) in its role as the resolution authority for failed banks has issued the key features for the steps to resolution. The Bank Recovery and Resolution Act (BaSAG) outlines how the issues surrounding failed banks are to be resolved. The most significant are:

  • A 100% bail-in for all subordinated liabilities,
  • A 53.98% bail-in, resulting in a 46.02% quota for all eligible preferential liabilities,
  • The cancellation of all interest payments from 1 March 2015, when HETA was placed into resolution pursuant to BaSAG
  • As well as a harmonization of the maturities of all eligible liabilities to 31 December 2023.

Subordinated liabilities is simply another term for depositor’s money in the bank. In the typical banking arrangement the bank’s assets are the loans on the books, while their creditors are all the depositors. The exact opposite of personal or business finance, where loans are liabilities and cash deposits are part of their assets. 

This sort of “bail-in” can cause a lot of panic in finance world, simply because people losing their deposits can demonstrate some serious concerns about how well a bank is operated. Clearly an uncharted path. Some concerns exist over the legal as well as the practical aspects of the “bail-in” concept. This makes the creditors of the bank more responsible for how the bank is run. If there appears to be any problems creditors simply will not lend money to a bank or if they do they will demand a much higher risk premium. This will of course raise interest rates for everyone.

Corinthia attempted to remove the guarantees by purchasing the bonds at a discount from the bond holders, primarily Commerzbank, AG and Pacific Investment Management Co., (PIMCO), who rejected this offer last month. The creditors are demanding that Austria pay up if Carinthia cannot pay. In either case the depositor’s monies are gone.

This rule was put into place after the Great Recession to help relieve the burden on the tax payers for bailing out banks. The results are yet to be determined, but like every regulation there are unintended consequences. Some of those consequences maybe, higher interest rates, depositors being extra cautious where they deposit their paychecks, fewer loans made to small or medium size businesses, bankers will be unwilling to take risks with business owners on such loans. 

 

In The United States

You maybe asking yourself why does this bank in Austria matter to me? Here is the short answer; YES; the United States banking regulators have adopted a similar rule. When a bank fails the regulators can force a bail-in of depositors monies to right the ship. Many people do not realize or understand that this can and most likely will wash up on the shores of America as soon as we have another major financial melt-down. Watching how this precedent action plays out may be an example of how it will work here in the States. 

I am clearly not suggesting that you take your money out of the banking system and hide it under your mattress, that would be foolish. Also I think that U.S. banks operate with safety and soundness regulations that help protect depositors money. This maybe one reason why gold and silver has shot up in price this past week. People still perceive precious metals as a safe haven for currency problems. 

Sources: Bloomberg, Financial Times, Superstation95
 
Remember:
People should be more concerned with the return of their principal than the return on their principal.
-- Will Rogers
 

Topics: Economy, Foreign Bank Accounts, Bank Risk, European Union

Banking and HR 2847: Hiring Incentives to Restore Employment Act

Posted by Wendell Brock on Thu, Jul 01, 2010

On March 18, 2010, President Obama signed HR 2847, unbeknown to most this law has several banking implacations/regulations and new taxes, even though it is not disclosed by its name: the Hiring Incentives to Restore Employment Act.

Much of the press and commentary about the resolution has centered on the tax benefits it affords to businesses that hire new employees between February 3 of this year and January, 1, 2011.

What has gone mostly unnoticed is how these incentives will be paid for by the Foreign Account Tax Compliance provisions known in Title V of the Act as Offset Provisions.

SUBTITLE A

Part I: Increased Disclosure of Beneficial Owners

Financial institutions that make payments, on behalf of their customers, to Foreign financial and nonfinancial institutions must withhold 30% of payments made to those institutions, unless such institutions agree to disclose the identity of such individuals and report on their bank transactions.

The bank risk for not withholding the 30% is with the financial institution that initiated the transfer of funds – in other words, the bank will be responsible to send to the IRS the 30% it should have withheld. The individual sending the money will be responsible to get a refund from the IRS on their tax return. Also denies a tax deduction for interest on non-registered bonds issued abroad.

Part II: Under Reporting With Respect to Foreign Assets

Anyone with more than $50,000 in a depository or custodial account maintained by a foreign financial institution must report it. Underpayments resulting from undisclosed foreign financial assets will incur an enhanced penalty.

Part III: Other Disclosure Provisions

U.S. shareholders of a foreign investment company must file annual returns.

Part IV: Provisions Related to Foreign Trusts

A foreign trust has a U.S. beneficiary if the beneficiary's interest in the trust is contingent on a future event or such beneficiary directly or indirectly transfers property to such trust or uses trust property without paying compensation to the trust. Owners of foreign trusts must report them in their taxes, and they will be penalized if transfers to and distributions from such trusts aren’t reported.

Part V: Substitute Dividends and Dividend Equivalent Payments Received by Foreign Persons Treated as Dividends

A dividend equivalent payment is considered a dividend from a source within the United States for purposes of taxation of income from foreign sources and tax withholding rules applicable to foreign persons.

SUBTITLE B

Delay in Application of Worldwide Allocation of Interest

Delays until 2021 the application of special rules for the worldwide allocation of interest for purposes of computing the limitation on the foreign tax credit.

SUBTITLE C

Budgetary Provisions

Increases the required estimated tax payments for corporations with assets of not less than $1 billion in specified calendar quarters. Provides criteria for compliance with the Statutory Pay-As-You-Go Act of 2010.

 

Topics: Banking, Bank Regulation, Bank Risk, Bank Regulations, Foreign Banks

New Rules for Deposit Insurance Assessments Based on Bank Risk

Posted by Wendell Brock on Wed, Apr 14, 2010

Yesterday the FDIC announced that the formula for how they assess deposit insurance would be changed for large banks (those with $10 billion of assets or more). Below is the notice with the links to the summary and the full document.  While this rule makes changes for "large banks" eventually this methodology will trickle down and become practice for smaller banks too.

Each bank, no matter the size, will need an objective, defensible methodology for analyzing, grading and stratifying their loan portfolio. They will also need the ability to stress test the portfolio beyond the typical raising or lowering of interest rates. Probable loss modeling will become the norm as bankers and examiners look deeper for risks in the portfolio. It will be important for bankers to have this information updated regularly based on current estimates of value of the assets backing the loans.

It is no longer simply how much the bank has on deposit that determines the banks deposit premium, it is centered on the risk the bank is to the bank insurance fund - how likely will the FDIC have to pay out to cover deposits. The loan portfolio that the bank is creating and servicing is where the risks are, which must be fully analyzed, using an objective, defensible method.

As you read this notice of what the regulators are going to start requiring from banks, you will realize that the questions will get tougher and the answers more complex. We are happy to help provide strategies and solutions to some of the tough questions banks will face.

Assessments
Notice of Proposed Rulemaking
On April 13, 2010, the FDIC Board of Directors (Board) adopted a notice of proposed rulemaking (NPR or proposal) and request for comment that would revise the assessment system applicable to all large insured depository institutions. The NPR would: (1) eliminate risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments for large institutions; (2) use two scorecards -one for most large institutions and another for large institutions that are structurally and operationally complex or that pose unique challenges and risks in the event of failure (highly complex institutions)-to calculate the assessment rates for all large institutions; (3) allow the FDIC to take additional information into account to make limited adjustments to the scores; and (4) use the scorecard to determine the assessment rate for each institution.

The NPR would also alter assessment rates applicable to all insured depository institutions to ensure that the revenue collected under the new assessment system would approximately equal that collected under the existing assessment system and ensure that the lowest rate applicable to small and large institutions would be the same.

On September 29, 2009, the Board adopted a uniform increase in assessment rates effective January 1, 2011. As a result of the Board's earlier action, assessment rates in effect on January 1, 2011, will uniformly increase by 3 basis points.

FOR MORE INFORMATION:

In less time than you take for a lunch break Silverback Portfolio Analytics can show you how to, analyze your loan portfolio with real-time asset valuations, use objective loan grading, provide stratification analysis, probable loss modeling and stress test simulations.

The full summary: http://www.fdic.gov/news/news/financial/2010/fil10014.html

The full text of the proposed rule: http://www.fdic.gov/news/board/april06.pdf

Topics: Loans, Regulations, FDIC Insurance Fund, Loan Grading, Asset Valuation, Probable Loss Modeling, Stress Test Simulation, Portfolio Analytics, Bank Risk

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