Deposit Confiscation Poses A Real Risk To Investors, Savers and Corporate Depositors (Part II)

Thursday, December 5, 2013
By Paul Martin

Gold Core
Thursday, 5 December 2013

In March 2013, the EU and IMF spearheaded the restructuring of the troubled Cypriot banking sector. Although the terminology of bank ‘bail-ins’ first entered public consciousness during the Cypriot financial crisis of March 2013, the idea of bail-ins as a central bank rescue mechanism has been openly discussed for a number of years amongst international central bank policymakers.

Cyprus became the defining event since it revealed the preparations and planning of international banking regulators and governments at the highest levels for the coming ‘Bail-In Regime’.

The market’s expectation was that Cyprus would be similar to previous Eurozone rescue packages applied to economies such as Greece, Ireland and Spain, where banks had their losses ‘bailed-out’ by governments, with the bail-out cost and risk transferred to the sovereign nation and funded by the taxpayer.

However, the backlash from taxpayers and certain political parties and a vicious circle of sovereign bank-induced debt was leading to recessions and the possibility of an economic depression. This may have contributed to the international monetary authorities, central banks and governments altering the approach to burden sharing, pushing the losses onto bank depositors.

The important shift from bail-out to bail-in had not been signalled in a very public way. The market’s expectation was therefore confounded when Eurozone finance ministers imposed bail-ins on Cyprus. This forced bondholders to convert into shareholders, and critically, imposed an element of bank deposit confiscation and the forced conversion of these deposits into bank equity.

Never before in the public’s perception had bank deposits been countenanced as potential financing sources for the rescue of insolvent banks. The public was shocked by the freezing and confiscation of deposits and the use of them in a desperate attempt to prevent banks from failing.

While bail-in generally refers to a bank restructuring where shareholders and various unsecured creditors such as bondholders are forced to share the rescue costs, after Cyprus, the term ‘bail-in’ became synonymous with possible deposit confiscation, where uninsured depositors were seen as unsecured creditors of the bank and liable to share bank restructuring costs.

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