Europe strikes deal to push cost of bank failure on investors

[Ghost of Cutten]

Quote from Lojanica:

People do not deposit their savings in a bank for risk. It is a risk off move.

Actually a lot of people invest in bank deposits for a higher return: CDs offering more than T-bills. Since there is no free money, that higher return comes at a higher risk - CDs issued at the bank of Mom & Pop in Bumfuck, Idaho, is not the same risk of default as t-bills from the US government.

Due to deposit insurance, small deposits are effectively backstopped by the sovereign. Although this can also go bust - see Greece etc.

Also, just because you want something to be a risk-off move, does not mean it is. Risk is not caused by your desires, it is caused by the economic characteristics of the investment vehicle and whoever guarantees it.

 

[Lojanica]

http://en.wikipedia.org/wiki/Arthur_W._Cutten

I like

 

[Lojanica]

Good discussion. I guess bank runs which is the reason put forth for central banking in the first place is gonna come back into vogue?


How about .gov selling bonds for various Dept's and not just US Treasuries. I'd favor a bond in the DHS over say US Dept of Education.

The whole student loan thing seems to be aticking time bomb whereas security is in vogue.

 

[Martinghoul]

Quote from Ghost of Cutten:
It is not a faith based system - it is a market, not a religion. Caveat emptor and all that. No one with more than two brain cells to rub together has faith in a bank - they should be assessing the creditworthiness, the management integrity and quality, the culture of risk management, and only investing in those institutions which have an impeccable record and credentials in all of those aspects.

Accepting that banks have risk (which is a fact, banks are not risk free investments) is just a recognition of reality. Assuming they are risk free is just idiotic. Remember, if you want the ultimate low-risk investment, you can always own t-bills.

There's an argument that some degree of protection of deposits is a) efficient; and b) actually can prevent large systemic crises. I happen to agree with that and we have empirical evidence to that effect. However, above and beyond the threshold, what you say above is spot on.

Quote from Ghost of Cutten:
Due to deposit insurance, small deposits are effectively backstopped by the sovereign. Although this can also go bust - see Greece etc.

You probably meant Cyprus? Even there they finally decided to leave the insured deposits alone, thank god. So far, in the West, I am not aware of any sovereign violating its depositor insurance guarantee (unless you consider Iceland and Icesave a violation, like I do).

 

[achilles28]

Canada, US, UK and Japan have gone ahead with "bail-in" rules.

S&L Crisis > LTCM > 2008 won't happen again. The end of a ~30 year era, of taxpayer funded bailouts. Historic, to say the least.

Check out the derivative exposure of major banks. Levered something like >60:1 against assets. If 2008 happens again = mushroom cloud.

 

[Martinghoul]

Quote from achilles28:
Canada, US, UK and Japan have gone ahead with "bail-in" rules.

S&L Crisis > LTCM > 2008 won't happen again. The end of a ~30 year era, of taxpayer funded bailouts. Historic, to say the least.

Check out the derivative exposure of major banks. Levered something like >60:1 against assets. If 2008 happens again = mushroom cloud.

Bail-in's are the right thing to do. The Danes were the first (after the crisis) to do it in February 2011 with Amagerbanken and they were 100% right. Taxpayer should be senior to the most senior bond holder and only junior to the insured depositor, period.

As to derivative exposure, achilles, stop listening to Dyler Turden. There are derivatives and there are derivatives. A notional of a derivative (which is what people use for their shocking "leverage" numbers) is a meaningless number. Otherwise, every single Eurodollar punter should be running for the hills.

 

[Lojanica]

Quote from achilles28:

Canada, US, UK and Japan have gone ahead with "bail-in" rules.

S&L Crisis > LTCM > 2008 won't happen again. The end of a ~30 year era, of taxpayer funded bailouts. Historic, to say the least.

Check out the derivative exposure of major banks. Levered something like >60:1 against assets. If 2008 happens again = mushroom cloud.

Kinda what I was alluding to. The metals were a fear trade combined with a cyclical bull market all wrapped up with hyperinflationary bow.

There may be merit to buying up some physical metal once the current metals bear market ends and before the next cycle of bursting bubbles.

 

[Lojanica]

Quote from Martinghoul:

Bail-in's are the right thing to do. The Danes were the first (after the crisis) to do it in February 2011 with Amagerbanken and they were 100% right. Taxpayer should be senior to the most senior bond holder and only junior to the insured depositor, period.

As to derivative exposure, achilles, stop listening to Dyler Turden. There are derivatives and there are derivatives. A notional of a derivative (which is what people use for their shocking "leverage" numbers) is a meaningless number. Otherwise, every single Eurodollar punter should be running for the hills.

OK. At least this is progress. That is an agreed to non-arbitrary solution.

The point I suppose to all this discussion is that it is NOT the status quo and it represents a tru change to how these events have been handled historically.

Yes?

 

[Martinghoul]

Quote from Lojanica:
OK. At least this is progress. That is an agreed to non-arbitrary solution.

The point I suppose to all this discussion is that it is NOT the status quo and it represents a tru change to how these events have been handled historically.

Yes?

"Historically" is a bit vague here, tbh. How far back are we talking about? Before the FDIC was established in the US, there was nothing in the US, for example. In the Eurozone, every national government, at least up until now, does whatever it feels is the right thing to do. For example, Ireland bailed out everyone and didn't haircut even the senior bondholders, let alone large depositors (that's because their depositor insurance covers unlimited amounts by law). In the UK, losses have been imposed on some subordinated bondholders of failed banks such as Bradford & Bingley, but no depositor haircuts.

So, in answer to your question, no, it hasn't been the status quo globally for roughly 80 years now. But before that, the status quo was even more exreme than what is being proposed now. In Europe, nobody knows what "status quo" even means, given that every country used to do whatever it wanted.

 

[Lojanica]

Quote from Martinghoul:

"Historically" is a bit vague here, tbh. How far back are we talking about? Before the FDIC was established in the US, there was nothing in the US, for example. In the Eurozone, every national government, at least up until now, does whatever it feels is the right thing to do. For example, Ireland bailed out everyone and didn't haircut even the senior bondholders, let alone large depositors (that's because their depositor insurance covers unlimited amounts by law). In the UK, losses have been imposed on some subordinated bondholders of failed banks such as Bradford & Bingley, but no depositor haircuts.

So, in answer to your question, no, it hasn't been the status quo globally for roughly 80 years now. But before that, the status quo was even more exreme than what is being proposed now. In Europe, nobody knows what "status quo" even means, given that every country used to do whatever it wanted.

That clears up the need for a policy and middle of the road is good I suppose. It is better than a taxpayer bailout which breeds poorly managed financial institutions and having depositor skin in the game will allow market forces to work better in directing money to the better managed financially sound institutions.

Thanks for all the info.