[FF Editorial: In April, we warned that by English Common Law, customers’ deposits are monies to be used by the banks in any manner at their absolute discretion because the customer is the creditor when he deposits any money with the banker and the said banker is the debtor. The ownersghip of the money is transferred to the banker, hence he is a debtor. The bank need only to refund the money when so demanded by the customer. However, if the bank is insolvent and bankrupted, the only recourse for the customer is that of an unsecured credit and he must join the queue in the bank liquidation and share in the left-over assets after secured creditors have been paid. So depositors monies are not safe! This legal principle has been in existence for over two hundred years. Depositors have been deluded by banking propaganda!]
This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, "serve as a model for dealing with future banking crises."1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as 'the template'; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits.
In their recently published paper "A Template For Recapitalising Too-Big-To-Fail Banks", authors Paul Melaschenko and Noel Reynolds argue for a “simple” mechanism to recapitalize failed banks without the use of taxpayers' money. They propose a process whereby a bank, if it reached the point of failure, could transfer ownership to a newly created holding company over a weekend and be recapitalized. The bank would then be sold, enabling the market to determine the ultimate losses to previous equity holders and creditors. And, yes, this scenario includes losses for depositors above a guaranteed limit. Presto! A new bank with a clean balance sheet, ready to receive liquidity support from the prevailing central bank, without the need for handouts, bailouts, TARP programs, or any other form of government assistance. Previous debt and equity holders and depositors of this failed bank would be left with an equity position in the new entity. This 'template' would ensure that "shareholders and uninsured private sector creditors (read: depositors and bond holders) of such banks, rather than taxpayers, bear the cost of resolution."2 While at the moment this framework is only outlined in a discussion paper, it confirms our suspicions. While the old template involved “bailing out” banks through the transfer of toxic assets from the corporate sector to the taxpayer, the new template calls for “bailing in”.