Titled ECONOMIC ACTION PLAN
2013 and tabled in the House of Commons by Minster of Finance James
Flaherty on March 21st, the official 2013 Canadian budget contains an
explicit provision that Canada will pursue the bail-in model for
systemically important banks for future bank failures!
Depositor haircuts have just jumped to this side of the pond, effective the next bank crisis/ failure:
From Page 144:
“The Government also recognizes the need to manage the risks associated
with systemically important banks—those banks whose distress or failure
could cause a disruption to the financial system and, in turn, negative
impacts on the economy. This requires strong prudential oversight and a robust set of
options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.”
Translated, Without the use of taxpayer funds means via depositor funds.
And the meat of the provision, from Page 145:
The Government proposes to implement a bail-in regime for systemically important banks. This
regime will be designed to ensure that, in the unlikely event that a
systemically important bank depletes its capital, the bank can be
recapitalized and returned to viability through the very rapid
conversion of certain bank liabilities into regulatory capital.
This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada.
Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants…
Confiscating
wealth from depositors will reduce risks for taxpayers??? Only those
with 100% of their assets in physical gold and silver, or those Canadian
depositors who are somehow not also taxpayers perhaps!
The bail-in provision in Canada’s 2013 budget can be found on pages 144,145:
www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
Here is the another view of the matter from one who likely knows, but is nameless here.
It could be argued that is already implicitly how the world works.
It wasn't just Cyprus. Italy
gave a (tiny) haircut to its depositors in the early 1990s. Iceland gave
a massive haircut to foreign depositors in 2008/09, and various small
banks in the U.S. have been giving haircuts to
unlucky uninsured depositors sporadically over the past decade, as
hundreds of small banks fail.
By the
way, "certain bank liabilities" include a large number of items, of
which deposits are the last resort. First to be wiped out are common
equity shareholders, then preferred equity shareholders,
then subordinated debt shareholders, then senior debt shareholders, and
only then are uninsured depositors (and deposit notes) considered.
Insured depositors are insured, so no real worry for the vast majority
of Canadians with less than $100K in their chequing
account.
So don't keep your money in chequing. Equities - if put to work in the markets over the years can't be touched, even by a failing bank.
Maybe Cyprus was a special case -- a hugely overgrown banking sector, with foreign depositors, etc.
Here is another blurb from CBC about how cypriot's cash was converted into bank "shares"
http://www.cbc.ca/news/world/story/2013/03/30/cyprus-bank-deposits.html
"Deposits of more than 100,000 euros ($128,000) at the Bank of Cyprus would lose 37.5 per cent in money that would be converted into bank shares, according to a finance ministry decree obtained by The Associated Press. In a second raid on these accounts, depositors also could lose up to 22.5 per cent more, depending on what experts determine is needed to prop up the bank's reserves."
So what to do?
"Well, gold and equities are one option. Real estate is another. Fixed income is out there, and some credit and high yield products look decent despite the ultra-low government bond yields. If you are truly nervous and have >100K in chequing, then open up a few accounts at different banks. Or spread it around (make sure this is legal) between you and your partner, and I think it is even possible to open a joint account that then enjoys additional insurance (though please check on this besfore acting). Bottom line, if you are willing to put up with the hassle of multiple banks, you can pretty easily insure $1 million or more, despite a $100K cap.
PS keep in mind you are getting a haircut of around 2% every single year you keep your money in deposits, just because the real rate of return in a chequing account is negative when you adjust for inflation. Honestly, over a twenty year time, that's going to eat 40% of your money and chances are an official haircut from the banks is probably going to eat 0% of it.
PPS the beauty of bank haircuts is that you can usually see them coming. Markets are not efficient. If you had an Italian government bond, as soons as the news starts to sour, the price drops and you lose money. It isn't like that with a chequing account. You get all your money back until hte moment that the axe drops. Policymakers and economists have been talking about the chance that Cyprus depositors would lose money for several months. It is only the depositors who weren't paying attention who got dinged. Something like 30% of the foreign depositors took their money out before the hit came.
PPPS, remember that Canadian banks continue to be voted the soundest in the world."Unnamed source
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