Now is your time to let the Conservative Government know what you think about bail-outs and bail-ins. Two credit rating agencies, Moodys and S&P, have downgraded Canadian banks, bringing up the question of bail-outs versus bail-ins.
What is a "bail-in"? Depending on who you talk to, it's a situation where the government authorizes the confiscation of personal bank accounts to prop up failing banks. Cyprus was in the news a little over a year ago as the first country to implement this scheme.
But if you find yourself talking to the monetary authorities, such as former Bank of Canada Governor Mark Carney, the "bail-in" regime is nothing to be afraid of. "The bail-in approach broadly speaking, not bail-in as it was performed a couple of weeks ago in Cyprus, but bail-in as a component of addressing systemic risk... is an absolutely necessary element, it doesn't solve everything but it's absolutely necessary," Carney said
A spokesperson for the Harper government agreed: "The 'bail-in' scenario described in the budget has nothing to do with consumer deposits and they are not part of the 'bail-in' regime."
The idea is that if - or when - the Big Five Banks (RBC, Scotiabank, BMO, CIBC and TD) fail, they won't require taxpayer bail-outs. Under the bail-in scheme, they'll tap into the assets they've been forced to put aside. Are those assets the savings accounts of individual Canadians and their families?
Well, let's examine what happened in Cyprus. The problem in a nut-shell is fractional reserve banking, where banks keep only a fraction of deposits while loaning the rest out to borrowers. It's kind of like if I had a storage garage business and offered to store your belongings while you're out of town. But then when you're gone, I loan your goods out to others to use. As long as you don't come back and ask for all your belongings all at once, I can keep this scheme going for as long as I want. It works even better with money, since money is a medium of exchange.
But what most people don't understand is from from an accounting standpoint, when you deposit your money into the bank, you are in fact loaning the use of that money to the bank. In other words, you become a creditor to the bank. As a bank depositor, you expose yourself to the ability (or inability) of the bank to give you back your money when you want it. That's why "deposits" are considered liabilities on bank's balance sheet.
The current bail-in regime in Canada is a process where the banks can convert liabilities into regulatory capital. Our wise overlords assure us that customer deposits are off the table, but the Conservatives Economic Action Plan 2013 says nothing about leaving deposits alone. It only states that, “the Government will consult stakeholders on how best to implement a bail-in regime in Canada.” As in, we'll cross that liability-to-capital bridge when we get there.
Since World War 2, Western governments have gotten into the deposit insurance business. The government acts as a guarantee that the depositors money is always in the bank even when the banking system is in crisis-mode. Since the 1980s, Western governments have also gotten into the bail-out business, which has only reinforced this belief that our deposits are safe.
The Canadian banks were bailed out by the Fed and the Bank of Canada in 2008. But Canada has the ability to print its own currency, which Cyprus does not. The Bank of Canada can fund the depositor insurance scheme. Cyprus had to rely on the European Central Bank.
But because taxpayer bailouts are as unpopular as ever, the elites were forced to come up with a new plan. Thus, the "bail-in." Drafted by the Bank for International Settlements (BIS) and endorsed by the G20 in 2011, the Agreement replaces the "too-big-to-fail" doctrine with "SIFI" - Systematically Important Financial Institution.
"The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation."
"Bail-in" is the function of using "unsecured and uninsured creditors" to absorb losses. Who are the uninsured creditors? We all are. Any amount of money you have in the bank that exceeds the government guarantee ($100,000 by the Canada Deposit Insurance Corporation) is at risk of disappearing. Since this is a BIS Agreement, all global commercial banks are at risk.
Once people understand what "bail-in" actually means, they might object to "their" deposits being confiscated to save the big banks. But this position neglects the legal framework which we live in. As I mentioned above, on a bank's balance sheet, deposits are listed under Liabilities. As a depositor, you are a creditor to the bank. This is your problem for not doing your due-diligence.
Now I'm not one to tell you what to do with your own money, but I wouldn't suggest holding large deposits of cash in one of the Big Five (especially if it exceeds the $100,000 guarantee limit). Credit unions are more numerous and regulated by the provinces. It's also a good idea to open up a foreign bank account, as keeping all your eggs in one basket is never a good idea. Of course, with the CRA's snitch-line, this option could back-fire, despite being legal. It also doesn't hurt to hold your savings in precious metals or even canned food if worst comes to worst.
Now the thing about Cyprus is that foreign depositors took the heaviest losses with their bail-in. Canada doesn't depend on foreign depositors as much as Cyprus does. It seems as if Canadians could be the first in line for asset confiscation. It's just a question of whether the CDIC keeps its word at the $100,000 insured deposit amount.
However, there is a problem. The CDIC is a ponzi scheme. They have about $2.5 billion to rescue bank accounts. This comes from taxing banks via fees. See the problem? Who insures the depositors money when the bank fails? The CDIC. Where does the CDIC get their money? From the banks.
CDIC's $2.5 billion is enough to cover 25,000 depositors at $100,000. If the Big Five Banks enter crisis mode, millions of customers will be at risk and the CDIC only has enough to cover 25,000 Canadians. Not to mention, the CDIC doesn't cover mutual funds, stocks, bonds, GICs and other term deposits with a maturity date of more than five years. Also, Treasury bills are, not surprisingly, uninsured. In addition, RRSPs, RRIFs, TFSAs and debentures are insured differently.
The CDIC can not cover all Canadian deposits. The reluctance of the government to implement bail-out policies in favour of bail-ins is strange considering that it can't meet the CDIC's obligations. But that's probably why the banks are being downgraded. It's not because of Canada's looming credit catastrophe. These agencies didn't see the '08 crisis coming. If they're aware of this impending disaster, they are out to lunch on its causes.
Confiscating bank accounts will not solve the problems of fiat currencies, centrally planning interest rates or fractional reserve banking.
A healthy market economy requires savings and investments. It requires a pricing system free from government intervention. Canada has none of these things. By keeping interest rates low, the Bank of Canada has dilapidated the capital structure. They are literally consuming capital in a vain attempt to prop up GDP numbers and the stock market.
The "bail-in" will only take away the funds necessary for a genuine recovery and redirect them to the large financial institutions responsible for the mess. It's like if my storage business was suffering because I don't have enough belongings to return when all the customers come for their goods. So instead of admitting that my business plan is flawed, I instead take ownership over the goods. But don't worry, the customers will be guaranteed a portion of what they previously owned 100% of.
The current CDIC regime can only account for 25,000 bank customers at a maximum of $100,000. Canada's credit crisis is likely to exceed this requirement. Whether the government takes a bail-out or bail-in approach is more or less irrelevant. In the former case they steal from taxpayers to prop up bankers. In the latter scenario, they take from the depositors themselves. So as a taxpayer, as long as you're not holding all your money in one of the Big Five (or the National Bank, Canada's sixth largest bank), you're better off with a bail-in. If only marginally.
The root of the problem lay in the fractional reserve banking system, the Bank of Canada's command and control economy, fiat currency and Canada's broader relationship in this crony-capitalist fascist empire. It's a problem that's solved by dismantling the Bank of Canada, returning to sound money, and decentralizing political power as much as possible. The bail-in vs. bail-out question is a false paradigm that neglects the fundamental problems in our banking system.
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