Bail Ins & Taking Private Wealth
By Daniel R. Amerman, CFA
Thursday, 10 October 2013
A new method of taking private sector wealth has been spreading around the world this year. This mechanism is called a “bail in”, and it is based on the premise that there are certain entities which are too important for the well-being of the general public to allow them to go into bankruptcy or to be liquidated.
The new “twist” is that the entity – which could be a major bank, or it could be the public retirement system for an entire country – is not bailed out through using outside funds from the general public, even though the protection of the general public is the reason for the intervention. Instead, funds are taken from the inside, on an involuntary basis, from selected classes of private sector investors who are judged as having the ability to pay, and the costs of maintaining the viability of this entity for the “greater good” are thereby concentrated in a small part of the private sector.
This has been seen in Cyprus with the “rescue” of their banking system. It has also been seen in Poland with the taking of assets from the private retirement system for the benefit of the government and the troubled public retirement system. Bail ins have now also been proposed in Canada when it comes to the preservation of “systemically important” banking institutions.
What it all comes down to is governments and international organizations changing the law, leaving investors without the protections which they thought they had. And this is important not only for banking depositors and investors, but also for anyone who is depending on private sources of wealth for their own retirement or long-term financial security. In this article, we will explore the different ways in which “bail ins” have worked or been proposed in these three real world instances.
What Is A “Bail In”?