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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

European Debt

Posted by Wendell Brock on Thu, Jun 03, 2010

When the European Union and International Monetary Fund bailed out Greece last month to the tune of 750 billion of fresh capital, there was no guarantee of how effective these actions would be.

And with the euro trading unpredictably, EU finance ministers are worried that it wasn't enough. The Euro's value has been up and down, at times losing as much as 12%.

As with the talk in America that our government's first bailout wasn't enough to buoy the economy, there are rumblings in Europe that more needs to be done with Greece to ensure that their problems don't spread to other European nations.

German Chancellor Angela Merkel defied German public opinion and supported the bailout. A Reuters article quotes her as saying, "We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries. If we simply ignore this problem we won't be able to calm down this situation."

Currency-wide problem

Greece, with its $236B (US) of debt, may be in the direst situation. But it certainly isn't the only EU economy that's racking up debt.

  • Portugal: $286 billion
  • Ireland: $867 billion
  • Spain: $1.1 trillion
  • Italy: $1.4 trillion

Each country owes money to one another in a web of loans so complicated and precarious that each country is dependent on the others to stay solvent.

The New York Times elegantly illustrates the problem with a tangled web of arrows signifying the various debt obligations of each country.

In the accompanying article, Eric Fine of Van Eck G-175 Strategies says, "This is not a bailout of Greece. This is a bailout of the euro system."

Will they or won't they?

Many people-from traders to government heads to ordinary citizens-aren't sure that Greece's government will be able to implement cost-cutting measures in the wake of stiff opposition from their constituency.

In return for their first 110 billion euro bailout package, Greece was required to levy stiff wage cuts to government workers and implement hefty tax increases. The government hopes to slash its debt from 13.6 percent of GDP to 3 percent by 2013.

On May 31, Greeks took to the streets in a 24-hour protest that shut down cruise ships. Labor unions are warning that more strikes are possible as the summer progresses.

Topics: debt, capital, euro, european debt, central banks, European Union

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