I am still sifting through the documents from the recent G20 Summit in Brisbane to see what our esteemed leaders (not!) have planned as their next brilliant move to reinforce neo-liberal principles. One of the least talked about outcomes from the recently concluded G20 Summit in Brisbane were the agreed changes to the banking systems operating in the G20 nations. The dialogue started in the G20 Finance Ministers’ and Central Bank Governors’ Meeting in Washington in April 2014. Clause 8 in the official Communiqué covered the aim of the G20 “to end the problem of too-big-to-fail” and signalled the “development of proposals by the Brisbane Summit on the adequacy of gone-concern loss absorbing capacity of global systemically important banks (G-SIBs) if they fail.” The Brisbane Summit would consider these proposals. The aim was to “give homeand host authorities and markets confidence that an orderly resolution of a G-SIB without exposing taxpayers to loss can be implemented”. You won’t believe what they came up with.
Unfortunately, all the G20 documents for 2014 are currently unavailable as the leadership transfers to Turkey for 2015 (the new WWW site seems to have eliminated the history of the G20 and its documents). But you can find the documents for the April 2014 meeting – HERE although the relevant appendix to the official Communiqué, prepared by the Financial Stability Board, can be found at the – FSB Chair’s Letter to G20 Ministers and Governors on financial reforms – Update on Progress.
The official Communiqué contained several appendices and the one covering the proposed solution to the ‘too-big-to-fail’ problem was prepared by the so-called – Financial Stability Board, which is “is an international body that monitors and makes recommendations about the global financial system”.
The Governor of the Bank of England, Mark Carney is the Chair of the FSB, which was created in April 2009 to replace the so-called inancial Stability Forum (FSF), which, in turn, had been “founded in 1999 by the G7 Finance Ministers and Central Bank Governors following recommendations by Hans Tietmeyer, President of the Deutsche Bundesbank”.
There was a call to expand the group in 2008 and the G20 Leaders Summit in April 2009 created the FSB. Its members include Heads of Finance and Economics or Treasury Departments of the G20 nations, Central bank governors, European Commission, IMF, World Bank, OECD, BIS and ECB officials and other related elites.
It is the mafia of neo-liberal economics.
Like most of these organisations, the FSB is dominated by suited men! Here is the current group:
Carney’s Appendix said that:
As the G20 Leaders directed, it is essential that systemically important institutions can be resolved in the event of failure without the need for taxpayer support, while at the same time avoiding disruption to the wider financial system. The expectation that systemic institutions can privatise gains and socialise losses encourages private sector risk-taking and can be ruinous for public finances.
This was in the context of the blanket acceptance of fiscal austerity by all G20 Leaders as the only way for the future conduct of government.
They no longer wanted responsibility for their banking systems but were ideologically opposed to nationalising them despite banking being heavily ‘public’ in the sense that, ultimately, the maintenance of financial stability, a public good, means that governments cannot allow them to become insolvent
The FSB was preparing the agenda for the G20 Brisbane Summit and called on the Leaders for support:
… to ensure that national authorities are empowered to co-operate fully with their counterparts in other countries, including by recognising foreign resolution actions and ensuring that debt issued under foreign law includes contractual recognition provisions so that bail-in is effective in a cross-border context.
The terminology – bail-in – enters the discourse to replace bail-out. It first appeared in 2013 when the European Commission, the ECB and the IMF conspired on Moarch 25, 2013 to defraud the Cypriot depositors as their banks failed.
The Commission wanted to avoid any further general bail-out funds being provided to the basket case economies in the Eurozone having previously providing emergency funds to Greece and Portugal.
In the case of Cyprus, they decided that the creditors of the two prominent banks in Cyprus would bear the brunt of the bank failure. It turned out they included deposits of more than €100,000 among the creditors alongside the debt holders and the owners.
So it was an advance on the so-called PSI (private sector involvement) that saw Greek government bond holders take serious losses as part of the rescue packages for that nation. Not only were bond holders who had bought debt in good faith being punished but now simple depositors who had simply lodged funds in these banks as part of their saving portfolio were seeing their funds stolen by the Troika.
At the time, it was claimed many of those who lost deposits were Russian money launderers. That was just a way of making us less concerned about what was taking place.
The elites thought they had found the magic rescue formula. On March 25, 2013, the President of the Eurogroup (Dutch finance minister Jeroen Dijsselbloem) issued a very terse statement – Statement by the Eurogroup President on Cyprus:
Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.
Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.
He was forced to make this qualification (“specific case”) after earlier in the day claiming that “Cyprus would be used as the model for future bailouts” which of course was an “open invitation to any investor with more than €100,000 in a eurozone bank to remove it without delay, which some then did”. (Source).
It was a typical European Commision/Council exercise in bungling. The sharemarkets started to frash, the euro depreciated and the cost of insuring European banks rose during the day, which then forced Dijsselbloem to issue the qualification.
But, of course, the plot was to use the Cyprus bail-in as a model for the future to further distance government from taking responsibility.
Bank deposits would now be confiscated any time the bank would face capital losses.
On October 15, 2014, the FSB issued a paper – Key Attributes of Effective Resolution Regimes for Financial Institutions – designed to inform the agenda at the Brisbane Summit.
Bail-in is described as the process to “achieve continuity of essential functions” of a bank, either:
(i) by recapitalising the entity hitherto providing these functions that is no longer viable, or, alternatively, (ii) by capitalising a newly established entity or bridge institution to which these functions have been transferred following closure of the non-viable firm …
It would involve:
1. Confiscation of creditor claims according “the hierarchy of claims in liquidation” to “absorb the losses”.
2. Use these funds to “convert into equity or other instruments of ownership of the firm under resolution”.
The hierarchy? There would be “flexibility to depart from the general principle of equal (pari passu) treatment of creditors of the same class”.
But it was noted that “equity should absorb losses first, and no loss should be imposed on senior debt holders until subordinated debt (including all regulatory capital instruments) has been written-off entirely”.
Senior debt is usually borrowing that has to be repaid first and is usually backed by collateral that can be sold if liquidation is required.
In the Cyprus case, the ECB was declared a senior debt holder!
None of the directors or senior officers of the bank would be liable – they would be “be protected in law (for example, from law suits by shareholders or creditors)”
By the time they got to Brisbane in November 2014 this plan had become the official narrative and it was clear who was going to be considered a creditor for the purposes of the bail-in resolutions.
The Too Big To Fail (TBTF) plan was outlined in the FSB’s document issued on November 10, 2014 – Adequacy of loss-absorbing capacity of global systemically important banks in resolution. It built on the Key Attributes document discussed above, which had described “the powers and tools that authorities should have to achieve this objective”.
The powers included:
… the bail-in power, i.e., the power to write down and convert into equity all or parts of the firm’s unsecured and uninsured liabilities of the firm under resolution or any successor in a manner that respects the creditor hierarchy and to the extent necessary to absorb the losses. Hence, the resolution strategies that are being developed for G-SIBs provide for a recapitalisation by a way of a bail-in
The FSB discussed what they called the need to set a “new minimum requirement” for the “total loss-absorbing capacity (TLAC)” for financial institutions.
In other words, to ensure banks have enough capital available in times of stress, which sounds reasonable before you delve into the detail.
You might familiarise yourselves with the new – International regulatory framework for banks (Basel III) – administered by the Bank of International Settlements, which replaced the Basel II guidelines.
The Carney plan wanted banks to have a minimum amount of so-called ‘junior’ liabilities (LAC) that would be ‘bailed-in’ ahead of senior creditors.
The process for resolution of a stressed bank would be that:
1. The minimum TLAC would see equity and Tier 1 capital written off. This would include all of the “existing Basel 3 minimum capital requirements” plus more. Tier 1 capital (or core capital) includes shares, retained earnings, and other assets (preferred shares etc).
2. Tier 2 capital would be converted into equity or written off next. Tier 2 (supplementary) capital includes undisclosed reserves, revaluation reserves, general provisions, and other assets).
3. If still not sufficient, the more senior creditors would be hit.
But the relevant distinction is between secured and unsecured creditors, given that the scale of bank losses in 2008 and after were so large that the Tier 1 capital and equity holdings would have been quickly lost.
You won’t find mention of ordinary deposits in the FSB document only to note that “insured deposits” are excluded from the TLAC.
But as Ellen Brown notes in an interesting account – New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners – which explains how pension funds will also be absorbed into the risk capital of the banks, that small depositors are insured against loss in the US and Europe “but deposit insurance funds in both the US and Europe are woefully underfunded”. Meaning depositors lose either way. However, in the US, at least, the underfunding claim is not accurate. I am reliably informed that the FDIC is guaranteed by the Treasury Department, which means it has an unlimited supply of US dollars available to it.
On November 11, 2014, Mark Carney (FSB Boss) gave a – Press briefing in Basel ahead of the G20 Summit in Brisbane.
He told the press that:
Senior debt could, for example, count toward a bank operating company’s TLAC if it was issued by the holding company, and the debt of the holding company is effectively subordinated to the debt at the operating company. Another way senior debt could be eligible for TLAC is if it could be subordinated in statutory terms so it could be made clear via statute that senior unsecured creditors could be bailed in before other senior creditors – the most obvious ones are depositors.
So ordinary depositors will become unsecured creditors (the largest group for a deposit-taking institution) under the new laws enacted in the G20 nations. The resolution process (that is, the bankruptcy procedure) would see deposits confiscated and turned into equity or liquidated to pay off secured debtors.
An insolvent bank could thus remain in operation by transferring deposits into capital.
We can no longer consider bank deposits to be secure (guaranteed by government). In the case of an insolvency process, they will be absorbed under these new rules, into the capital structure of the bank and dealt with accordingly.
While it is sensible for banks to have more capital to insulate them against losses, it is outrageous that ordinary depositors would have to pay the costs of a bank going broke, when it is easy for a currency-issuing government to step in, nationalise the institution, sack all the managers and decline to pay bonuses etc, and then restructure the institution with the deposits intact.
Otherwise, why would an ordinary person risk their savings.
The alternative is to boycott these large institutions and develop not-for-profit mutual funds/community banks, which do not risk their depositors’ funds in the global derivatives casino.
The FSB proposed was approved by the G20 Brisbane meeting with little discussion. Cyprus is now the bankruptcy model.
It is unlikely that small depositors will be implicated. But as we learned from the Cyprus scandal, the life savings of people were above the threshold that the Troika confiscated.
Certainly, if you have largish deposits (as part of your life saving, for example), these new rules provide a massive incentive to transfer them into a more protected form of assets. With interest rates very low, holding cash in safe boxes becomes attractive.
Once again the world leaders come up with solutions that are not in the interests of the common folk.
That is enough for today!
(c) Copyright 2014 William Mitchell. All Rights Reserved.