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Bail In

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Paupertas
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Bail In

#342953

Postby Paupertas » September 26th, 2020, 10:00 am

Following the last financial crisis countries around the world have changed the law to allow a bail in to save the banking sector. We last saw this in Europe with Cyprus:
Failing banks, bail-ins, and central bank independence: Lessons from Cyprus


https://voxeu.org/article/bank-bail-ins ... iot-crisis

The BofE has hinted at negative interest rates and the banking sector seems to be up to its old tricks again:

World's biggest banks 'allowed criminals to launder dirty money', leaked documents allege


https://news.sky.com/story/worlds-bigge ... e-12077604

I just wondered about NS&I if there is a bail in. Would our money be safe(r) from a bail in if it was deposited with NS&I?

NeilW
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Re: Bail In

#342958

Postby NeilW » September 26th, 2020, 10:09 am

Paupertas wrote:I just wondered about NS&I if there is a bail in. Would our money be safe(r) from a bail in if it was deposited with NS&I?


Bail in is simply turns depositors into bond holders in a bank. There are many that would argue that anybody depositing in a bank should be bailed in and stand losses if loans go bad. There are others that argue that depositors should be 100% insured by the state so that deposits are essentially the same as cash and in return the interest rate on deposits should be zero - just like cash.

NS&I is 100% owned by HM Treasury, and since HM Treasury also owns and controls the currency it can never be bailed in. NS&I is as good as cash because ultimately its liabilities have the same ownership as the liabilities backing cash itself.

Spet0789
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Re: Bail In

#342969

Postby Spet0789 » September 26th, 2020, 10:40 am

NeilW wrote:
Paupertas wrote:I just wondered about NS&I if there is a bail in. Would our money be safe(r) from a bail in if it was deposited with NS&I?


Bail in is simply turns depositors into bond holders in a bank. There are many that would argue that anybody depositing in a bank should be bailed in and stand losses if loans go bad. There are others that argue that depositors should be 100% insured by the state so that deposits are essentially the same as cash and in return the interest rate on deposits should be zero - just like cash.


This is wrong.

Bail in rules protect depositors.

In the financial crisis, retail depositors and institutional bond holders ranked together. It wasn’t possible to impose losses on the institutions that had lent banks money without also imposing losses on the retail depositors.

The bail in rules address this by effectively subordinating institutional bond holders. In a future crisis, they will have losses imposed (either by having their debt become equity or by simply losing their money). This makes deposits safer.

So now, the safety ladder looks like this:-
1) NSI (govt guaranteed)
2) Bank deposits (up to the FSCS thresholds, also government guaranteed so practically the same as NSI).
3) Bank deposits above the thresholds.
4) Old bank bonds issued before the bail in rules (very few left now)
5) More recent bank bonds (technically called MREL/TLAC eligible)
6) Subordinated or hybrid bank debt
7) Bank equity

Hope this helps.

scrumpyjack
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Re: Bail In

#342994

Postby scrumpyjack » September 26th, 2020, 11:51 am

Also note that NatWest (RBS) is majority owned by the government (62% I think) so I think it is unlikely in the extreme that HMG would allow ordinary retail depositors to have to take a haircut if over the FSCS limit. This might arise for 'ordinary people' if for example someone was moving house and the proceeds of the sold property were in an account pending completion of the new one.

mike
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Re: Bail In

#343001

Postby mike » September 26th, 2020, 12:26 pm

scrumpyjack wrote:This might arise for 'ordinary people' if for example someone was moving house and the proceeds of the sold property were in an account pending completion of the new one.


This and other similar events are already protected under FSCS
FSCS protects temporary high balances in your bank account of up to £1million for up to twelve months. The protection begins from the date the temporary high balance is credited to an individual depositor's account, or to a client's account on an individual's behalf. This date may be earlier than the date the temporary high balance was credited to your account with the failed firm. You don't need to tell us if you have a balance higher than £85,000.

Certain life events could have caused a temporary high balance in your bank account, including:

- Real estate transactions (property purchase, sale proceeds, equity release - relating to your main residence only. This does not have to be a UK property but must relate to your main residence).
[and 13 other instances including divorde and inheritance are listed]

https://www.fscs.org.uk/how-we-work/claims-process/temporary-high-balances/

NeilW
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Re: Bail In

#343030

Postby NeilW » September 26th, 2020, 2:54 pm

Spet0789 wrote:This is wrong.

Bail in rules protect depositors.


If you were protecting depositors you wouldn't be bailing in in the first place. The whole point of bail-in is to disenfranchise depositors. And we see different ways of doing that across Europe.

Paupertas
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Re: Bail In

#343066

Postby Paupertas » September 26th, 2020, 6:23 pm

Thanks for the replies

I don't pay too much attention to the FSCS. This stems from the EU (€100,000) and wasn't set into law as far as I am aware - I think some countries like Germany objected. Austria, for example, doesn't have any compensation scheme. I won't go over the limit with any bank but wouldn't be surprised if the scheme vanished if things get really bad.

langley59
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Re: Bail In

#343092

Postby langley59 » September 26th, 2020, 8:41 pm

One of the things I learnt 12 years ago was that if you deposit money in a bank account it is legally no longer yours, rather you have made an unsecured loan to the bank. Fundamental but not widely known at the time.

ursaminortaur
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Re: Bail In

#343426

Postby ursaminortaur » September 28th, 2020, 11:43 am

NeilW wrote:
Spet0789 wrote:This is wrong.

Bail in rules protect depositors.


If you were protecting depositors you wouldn't be bailing in in the first place. The whole point of bail-in is to disenfranchise depositors. And we see different ways of doing that across Europe.


No the Bank resolution legislation objectives are

https://srb.europa.eu/en/content/resolution-objectives

When applying resolution tools and exercising resolution powers, the SRB and, where relevant, NRAs, take into account the resolution objectives, and choose those resolution tools and resolution powers which best achieve the pertinent resolution objectives.

The BRRD and the SRMR set the following resolution objectives:

to ensure the continuity of critical functions;
to avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline;
to protect public funds by minimising reliance on extraordinary public financial support;
to protect depositors covered by the Deposit Guarantee Scheme Directive (DGSD) and investors covered by the Investor Compensation Scheme Directive (ICSD);
to protect client funds and client assets.When pursuing the resolution objectives, the SRB and, where relevant, NRAs will seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives.


One of the resolution tools is a bail-in

https://srb.europa.eu/en/content/tasks-tools

Bail-in is a key resolution tool provided for in the BRRD. It allows to write-down debt owed by a bank to creditors or to convert it into equity.

By replicating how creditors would incur losses if the bank had gone bankrupt, it reduces the value and amount of liabilities of the failed bank. It thereby protects taxpayers from having to provide funds to cover these liabilities, while allowing for the critical functions of the bank (e.g. deposit-taking, lending, operation of payment systems) to be uninterrupted.

The bail-in tool can be used to:

Recapitalise the institution under resolution to the extent necessary to restore its ability to comply with the conditions for its authorisation and so continue performing its authorised activities, and to sustain market confidence in the institution; or
Convert to equity, or reduce the principal amount of, claims or debt instruments that are transferred to a bridge institution (in order to provide capital for that bridge institution) or under the sale of business tool or asset separation tool.


The BOE has similar resolution objectives

https://www.bankofengland.co.uk/financial-stability/resolution

The Banking Act 2009 sets objectives we must have regard to when we prepare for and carry out resolutions.

These are to:

Make sure banking services and other functions provided by firms which are critical to the economy remain available.
Protect and enhance financial stability.
Protect and enhance public confidence in the financial system’s stability.
Protect public funds.
Protect depositors and investors covered by the FSCS.
Protect (where relevant) client assets.
Avoid interfering in property rights.


https://www.bankofengland.co.uk/financial-stability/resolution

The three main strategies are:
Bail-in

This is our preferred strategy for the largest firms that provide vital services to the UK economy.

The firm’s equity is written off, and debts written down, to absorb losses. Then it is recapitalised – the debtholders whose debt was written down are issued equity and become the new shareholders. In the medium-term, it would be restructured to address the causes of failure and restore market confidence.
.
.
.


Depositors are protected upto the FSCS limits but risk losing anything above that level. There is no conversion of depositors into bondholders - the idea is to get rid of bank debt not create new debt holders from depositors. Though after the bank problems have been resolved the bank will issue more bonds in the usual manner.

NeilW
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Re: Bail In

#343440

Postby NeilW » September 28th, 2020, 12:30 pm

ursaminortaur wrote: There is no conversion of depositors into bondholders - the idea is to get rid of bank debt not create new debt holders from depositors.


Nobody ever said they would be.

With the bail-in concept, Depositors become like bondholders - subject to a haircut and therefore part of the capital structure of the bank but subordinate to the existing equity and bondholders, rather than being treated as just holders of cash that is notionally 'stored' in a bank.

ursaminortaur
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Re: Bail In

#343447

Postby ursaminortaur » September 28th, 2020, 12:57 pm

NeilW wrote:
ursaminortaur wrote: There is no conversion of depositors into bondholders - the idea is to get rid of bank debt not create new debt holders from depositors.


Nobody ever said they would be.

With the bail-in concept, Depositors become like bondholders - subject to a haircut and therefore part of the capital structure of the bank but subordinate to the existing equity and bondholders, rather than being treated as just holders of cash that is notionally 'stored' in a bank.


Obviously I misinterpreted your

NeilW wrote:Bail in is simply turns depositors into bond holders in a bank.


then though it does still look to me that you were saying that depositors become bondholders.

NeilW
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Re: Bail In

#343454

Postby NeilW » September 28th, 2020, 1:09 pm

ursaminortaur wrote:
then though it does still look to me that you were saying that depositors become bondholders.


I should have been clearer. My apologies.

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Re: Bail In

#343475

Postby Spet0789 » September 28th, 2020, 1:52 pm

If you are a depositor, the bail-in rules have created a new class of borrowing which is junior to you (ie they lose their money before you lose any of your money).

That makes deposits safer. End of story.

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Re: Bail In

#343491

Postby Spet0789 » September 28th, 2020, 2:59 pm

NeilW wrote:
Depositors become like bondholders...rather than being treated as just holders of cash that is notionally 'stored' in a bank.


This wasn't the case before the bail in rules and isn't the case now. It's a fundamental misunderstanding of how banking works. How could a bank pay any interest if depositors were "holders of cash that is notionally stored in a bank"? That would be economically equivalent to just hiring a safe deposit box and jamming it with £50 notes.

As has been correctly said, a deposit is an unsecured liability of the bank in question. What the bail-in rules have done is increased the amount of capital that exists to absorb losses before unprotected deposits (ie those above the FSCS threshold) lose money hugely... from roughly 4% of a bank's assets pre-crisis to 25% now.

Hence, bail-in rules have made unprotected deposits much safer.

NeilW
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Re: Bail In

#343507

Postby NeilW » September 28th, 2020, 4:15 pm

Spet0789 wrote: It's a fundamental misunderstanding of how banking works.


It isn't. What you are suggesting is a fundamental misunderstanding of how banking works on an aggregate basis. Banks don't offer deposit accounts for the good of their health. They'd rather not bother and would just use a wholesale overdraft at the central bank if one was on offer.

They offer retail accounts because they are essentially required to by banking regulations, as Parliament, via the central bank, wants a working payment system in Sterling - and has settled on the outsourced model.

How could a bank pay any interest if depositors were "holders of cash that is notionally stored in a bank"? That would be economically equivalent to just hiring a safe deposit box and jamming it with £50 notes.


Loans create deposits. Banks earn on the differential between those two. They offer interest largely to stop cheap depositors leaking to National Savings and cash which would leave the loan book exposed if enough of it disappeared.

When you put the £50 note into a bank that causes an automatic loan to the central bank remunerated at the base rate (that's what banks reserves are) and a corresponding deposit in the bank.

It is a matter of public policy to allow depositors with interest. The central bank could easily dispense with that by offering unlimited 0% overdrafts to those on the Sterling framework. The banks wouldn't need to attract depositors away from cash and National Savings to balance their loan books and the price would drop to zero.

In fact banks would probably start charging again to process your payments. And the way base rates are going at the moment we might start to see that happen anyway.


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