Depositors Beware

Cyprus-style bank "bail-ins" now also approved for Canada
July 1, 2013

One of our most solidly entrenched assumptions, going back even to childhood, is that when we deposit our money in a bank, it is safe and available for our use at any time. So, back in March when we learned that the European financial powers-that-be were arranging to rescue the troubled banks of Cyprus by appropriating the money entrusted to them by depositors, we were shocked.

We might have been less disturbed if a portion only of large uninsured deposits were to be taken. But when we learned that even 6.75% of small, insured deposits under 100,000 euros were targeted, we fully understood why Cypriots were angrily protesting in the streets. These protests prompted the Cypriot Parliament courageously to take small depositors off the hook — except for any hardships resulting from having their withdrawals limited to 300 euros per day. But 60% of deposits over 100,000 euros were seized to rescue the banks and, allegedly, the economy of Cyprus.

This procedure — this theft — is now called a "bail-in" as distinguished from a "bail-out" such as that engineered massively in the U.S. in 2008 to rescue the "too-big-to-fail" banks, whose speculative and fraudulent practices brought on the devastating, ongoing Great Recession. A bail-out steals from taxpayers, whereas a bail-in steals from depositors. Pretty much the same people.

But we Canadians can take comfort, can we not, from the oft-repeated assurance of the Harper government that our exceptionally sound Canadian banking system is immune from such abuses. How, then, are we to account for the fact that the 2013 omnibus Federal Budget, passed on June 10 courtesy of Harper's majority, included a barely noticed provision announcing that any major Canadian bank which may get into deep trouble will be rescued through a bail-in? Here is the wording of that provision:

"The Government proposes to implement a 'bail-in' regime for systemically important banks. This regime will be designed to insure 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 for Canada..."

Included among "bank liabilities" are our deposits, since "regulatory capital" consists of shares of the bank's stock. With bank insolvency imminent, "certain bank liabilities" (how vague can you get?) — including insured and uninsured deposits, mutual funds, "guaranteed" investment certificates, retirement savings plans, etc. — would be subject to conversion into bank shares. The funds realized would be used in attempts to bring the troubled bank back to solvency. Depositors would no longer have immediate access to their money, but, as shareholders, would be free to sell their stock, perhaps at a considerable loss.

Responding to expressions of alarm about this Budget provision, the Harper government issued a "clarification": "The bail-in scenario described in the Budget has nothing to do with depositors' accounts and they will in no way be used here [in Canada]. Those accounts will continue to remain insured [up to $100,000] through the Canada Deposit Insurance Corporation, as always."

But can we trust this assurance? The legislation itself says nothing about guaranteeing protection for depositors. And even if insured deposits are intended for favoured treatment, we have no way of knowing whether the CDIC would have sufficient resources to cope with a financial meltdown. And we are expected to be comforted by the promise that taxpayers will be spared!

How did the bail-in procedure get imposed on us? It was embraced as an alternative to using bail-outs which might arouse resistance from taxpayers and governments, as occurred in Iceland. The Bank of International Settlements, which dominates the central banks of capitalist nations in the interests of private banking, pushed the bail-in alternative, which was approved by the G-20 nations at their 2009 meeting. With passage of our 2013 Budget, we can now be told that bail-ins have been "democratically" approved for Canada.

And the story gets even worse. As we know, the world's largest banks have been gambling with high-risk derivatives on an immense scale — in the U.S. some $230 trillion! Banks on the losing side of derivative bets can quickly be driven to insolvency. With the recently accepted bail-in strategy, we can expect that the winning derivative operator, the "counter-party," will now be given priority over all other creditors, including depositors.

We do not know the extent to which our Canadian banks are involved in risky derivatives. But so intertwined are global banking operations that our banks might suffer from a collapse initiated elsewhere. We are being set up for sudden, larger-than-ever shifts of wealth from the middle class to the already obscenely rich.

(Jerry Ackerman, Ph.D., is a financial analyst and advocate of public banking. George Crowell, retired University of Windsor professor, has been working on monetary issues since 1994.)