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EU Bank Depositors: Your Mattress Is Starting To Look Awfully Attractive - Bank Risk, Reward & Compensation

Reggie Middleton's picture




 

Cyprus-central-bank

Cyprus-central-bankFollowing up my latest rant on the Cypriot debacle, Economic Depression Is The New Success, I want to make perfectly clear that the EU banking system in Europe is irrevocably broken. The ECB/EU has demonstrated this through Cyprus, definitively. Let me break it down...

All investors price their investments, whether consciously and prudently or frivolously, by demanding "X" units of return for "Y" units of risk. This risk/reward ration is clearly delineated in a sound banking system, where the investments with highest (perceived) likelihood of return are priced accordingly, with the most expensive risk. The dimensions of risk run the gamut from credit risk, liquidy risk, market risk, legal risk, duration risk, etc. At the top of this risk ladder or hierarchy are products such as equities, complex derivatives, etc.

In the middle tier are often fixed income instruments such as junior and senior bonds. At the bottom of this risk hierarchy are products that have relatively little (perceived) risks and high liquidity, hence offer very little return in exchange. These products includes demand deposit accounts (checking and savings accounts), certificates of deposits, etc.

So, at the top of the risk ladder you have products that may have nearly no liquidity and high credit and market risks, but can offer high returns. At the bottom of this ladder are uber-liquid (at least perceived to be so) products that feature very little "relative" risks, hence are often priced to offer very little return as well. For instance, in the US, you can receive a 300% return from a front month, OTM put option with several days, but receive only 1% return from your checking account over a period of a year, or 4% in Cyprus banks. 

So... What happens when the account that you are receiving payment from being the lowest run on the risk ladder yields the risk that exists at the top of the ladder? Or, in other words, what happens if you get robbed and misrepresented as to the true nature of the product that you purchased? This is what happened in Cyprus, where they paid their depositors savings account returns but made them assume front month put option risks!

The deposit accounts that you were getting just a few hundred basis points for have developed:

  1. Liquidity risks: The capital controls that weren't supposed to happen (see No Capital Controls In The EMU? Liar Liar Pants On Fire), happened! See Cyprus Banks Set To Reopen, To Serve As Glorified ATMs With A €300 Cash Withdrawal Limit
  2. Credit risks: Your so-called safe investments will suffer up to a 40% haircut! Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression
  3. and Market risks: Demand depositers have forcibly purchased highly speculative synthetic call options with their haircuts that are unlikely to compensate anyone for anything!

The little app below calculates what return you should expect to receive to take on the risk of a potential 40% haircut. The second tab offers what recent Cyprus bank rates were. Do you see a disparity???

NOTE: Due to technical difficulties, you will have to go to BoomBustBlog to use this live bank deposit pricing calculator. Click here for the link and scroll down until you see the for to input your bank account balances...

 

It's not just Cyprus either. The problems that plagued Cyprus banks plague banks in much larger nations within, and around the EU. From Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe you see institutions that are literally too big to be handled safely...

The Banks Are Bigger Than Many of the Sovereigns

image015.png image015.png

Of course, there's never only one roach, despite the back and forth coming from EU leaders... 

So, let there be no misunderstanding - if it can happen to Cyprus banks, it can likely happen to your EU bank as well. Go back up and adjust the app/calculator haircut to just 5% (you may have to scroll to the right) and see if your getting compensated for the risk that you are taking in your speculative bank!

Ready! Set! Bank Run!!!

Cyprus contagion raw Cyprus contagion raw

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Thu, 03/28/2013 - 20:43 | 3387377 Jim in MN
Jim in MN's picture

Aw, I thought you said 'mistress'....which is none of your beeswax anyway BTW.

Thu, 03/28/2013 - 20:00 | 3387257 deerhunter
deerhunter's picture

Law  or Physics,  where and what do you farm on that many acres?  Grew up working summers on dairy farms and in orchards.  That is a boatload of acreage.  Just wondering?  Loved working in orchards but unless you are born into it you don't just buy that kind of land in Michigan and plant trees and vines. 

Thu, 03/28/2013 - 17:06 | 3386773 Winston Smith 2009
Winston Smith 2009's picture

Same warning for Canadians:

Canada Discusses Forced Depositor Bail-In Procedures for "Too Big To Fail" Banks in 2013 Budget

Read more at http://globaleconomicanalysis.blogspot.com/#kdczBDMzGMYq584Z.99

 

Thu, 03/28/2013 - 14:41 | 3386144 falak pema
falak pema's picture

in this mad world the statists desperate to stop the debt hemorrhage and to get reelected  have no better idea than to rob the robbers by bending the law AGAIN; the very law that was bent a first time to allow those bankstas to rob the people by socialising the debt, by libor fixing, by QE/Zirp etc. etc. etc....will now be twisted to save their own skins.

When the rules mean nothing the state loses all credibility and that is the worse thing that can happen in a republic. 

Meanwhile we close the hatches on the Titanic and hope the iceberg will dissolve on its own. 

Thu, 03/28/2013 - 13:57 | 3385995 Tombstone
Tombstone's picture

Speaking of matress stuffing, Valcambi, a Swiss gold refiner, is now selling gold bars made up of 50 grams (about 1.6 oz).  You can break this bar apart into 50 one gram segments for future use as a means to buy whatever.  They may hold their value a bit better than stinky old dollars.

Thu, 03/28/2013 - 12:55 | 3385786 mind_imminst
mind_imminst's picture

Bank run? I don't think so. You should be careful Reggie. Politicians and Central Bankers are aligned (in stupidity) now. My feeling is that they will provide all the liquidity any market or bank system needs. Trillions or quadrillions if necessary. The erroneous lesson they learned from Lehman, is to not let any big bank fail anywhere in the world. I would not be shorting banks stocks with the FED propping them up to infininty. Seems risky.

Thu, 03/28/2013 - 14:34 | 3386115 BigJim
BigJim's picture

Long TBTF, short sub-TBTF?

Thu, 03/28/2013 - 12:20 | 3385657 Diogenes
Diogenes's picture

Canada's new budget contains a provision for Cyprus style "bail ins" of big banks. It is interesting that the budget was tabled on March 21 while the Cyprus bail in was announced on Sunday the 17th. It does not seem possible the budget was revised between the 18th and 21st. So that means the bail in provision was written in before that, possibly months before. Which implies that someone knew the "template" was coming, long before Cyprus blew up.

 

" The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure 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 in Canada.
Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants…"

Thu, 03/28/2013 - 16:25 | 3386635 dontgoforit
dontgoforit's picture

The Bilderberg's.

Thu, 03/28/2013 - 11:21 | 3385435 Fuh Querada
Fuh Querada's picture

So where's your moaney, Reggie? Divided between the kitchen freezer and your account at J.P. Morgue?

Thu, 03/28/2013 - 11:15 | 3385417 ebworthen
ebworthen's picture

Good job Reggie.

Jim Rogers just agreed with you and had to say it twice for Carl Quintanilla on CNBC.

"You'd better hurry and get your money out of Europe before it's too late." 

"The IMF and the ECB have condoned stealing depositor money.  The politicians say 'Don't worry this is a unique circumstance' and if a politician says that you know it isn't true so people need to get their money out." Rogers said (paraphrased but pretty close).

Thu, 03/28/2013 - 10:27 | 3385251 Mototard at Large
Mototard at Large's picture

Savers and takers.  What we are seeing in Cyprus and Spain is unnerving for many people – especially savers.  The new struggle over the next few years will be between the savers and the takers.  The government, the Banks and supra-national organizations are creating new policies that say they can take your savings  http://tinyurl.com/d9d74qf

Thu, 03/28/2013 - 14:43 | 3386163 NotApplicable
NotApplicable's picture

That'll learn those stupid savers!

Thu, 03/28/2013 - 16:23 | 3386617 dontgoforit
dontgoforit's picture

Guess that rainy day 'll just have ta' wait.  Yeah, right.

Thu, 03/28/2013 - 10:21 | 3385225 The Luftwaffe
The Luftwaffe's picture

The Mattress is looking attractive for Canadians as well

 

This is what is buried on page 145 of  Canada’s 2013 budget: 

The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure 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 (translation: your money) into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants…


See the budget yourself:

www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf

 

Thu, 03/28/2013 - 16:22 | 3386610 dontgoforit
dontgoforit's picture

Are you shitting me?  Not the Canucks, too.

Thu, 03/28/2013 - 19:51 | 3387233 Uber Vandal
Uber Vandal's picture

It's almost like a global collusion or something.

Or that might be the tinfoil talking.

 

Thu, 03/28/2013 - 13:35 | 3385924 Mototard at Large
Mototard at Large's picture

Last week, the federal bank regulator in Canada (OFSI) also determined that six of Canada's banks were too big to fail.  Rather strange, as they have not said this before, although it was often generally assumed within the industry that only the Royal Bank of Canada was "systemically important."  No real explanation of why the sudden change of heart on the part of the regulators and now the government - unless they see something coming down the road.....

Thu, 03/28/2013 - 10:39 | 3385294 Mercury
Mercury's picture

Nice find.

The only important detail which of course they are vague about is exactly which "certain bank liabilities" the "regime" has in mind.

Thu, 03/28/2013 - 10:28 | 3385256 Reggie Middleton
Reggie Middleton's picture

I've got better stuff than that which I will start releasing on my site tonight/

Thu, 03/28/2013 - 11:26 | 3385467 newworldorder
newworldorder's picture

Reggie,

Your opinion on what happens to physical PM stored within the Canadian Banking System? RE: PHYS, CEF, PSLV? Do they fall within the same Canadian Government Regulations?

Thu, 03/28/2013 - 15:07 | 3386265 WhackoWarner
WhackoWarner's picture

PHYS, CEF, PSLV  are all stored outside the banking system.  Brinks etc. 

MNT is held at Canada Mint.

Thu, 03/28/2013 - 14:33 | 3386112 The Luftwaffe
The Luftwaffe's picture

newworldorder:

 

Absolutely nothing in the system is safe and sacrosanct. Desperate banks and governments can steal whatever they want, whenever they want. There is more than enough evidence all around us to show that the most prudent thing to do is get as much as you can out of  the system, and keep it out

Thu, 03/28/2013 - 14:43 | 3386161 NotApplicable
NotApplicable's picture

In summary: Laws are legal, until they aren't.

Thu, 03/28/2013 - 10:21 | 3385220 Mercury
Mercury's picture

Initiating Coverage

Banco Posturepedica: STRONG BUY

Thu, 03/28/2013 - 10:08 | 3385166 indio007
indio007's picture

Maybe you should look into the fraudulent rehypothecation in the US Reggie....

Specifically the Fed's Borrower in Custody program. Every asset (residential mortgages) pledged to this program is supposed to have a UCC 3 , (in favor of the FED)statement filed with it. I have yet to find one filing in ANY state.

 

Either the program has never been used or there is massive fraud. This could be the smoking gun of where all the missing promissory notes + mortgages went.

 

"INTRODUCTION 

A depository institution obtaining discount window credit must have completed certain lending 

documentation (Operating Circular 10) as well as pledge acceptable collateral in an amount sufficient to 

secure an advance and accrued interest. To assure that sufficient collateral is available for ongoing 

programs such as the Seasonal Credit Program or for contingency situations; institutions should 

maintain a pre-determined amount of collateral pledged at the Reserve Bank. 

One available option is to maintain collateral in a Borrower-In-Custody (BIC) arrangement. Collateral 

held in such an arrangement may be used to secured advances and/or credit for the discount window, 

Payment System Risk (PSR) or to the Treasury, Tax, and Loan (TT&L) program. BIC arrangements 

allow healthy depository institutions to pledge loans (including but not limited to commercial real estate, 

commercial loans, one-to-four family real estate mortgage loans, consumer loans, student loans) as 

collateral to the Federal Reserve. Custody and servicing of the loans are maintained at the 

participating depository institution thus avoiding the expense and burden of submitting loan 

documentation directly to the Federal Reserve. "

Thu, 03/28/2013 - 12:54 | 3385782 G_T_A_44
G_T_A_44's picture

"Either the program has never been used or there is massive fraud."

 

The latter: massive fraud.

Thu, 03/28/2013 - 16:21 | 3386602 dontgoforit
dontgoforit's picture

Would be my conclusion as well given the bad guys who've been exposed aren't even being prosecuted...

Thu, 03/28/2013 - 10:05 | 3385152 TrulyStupid
TrulyStupid's picture

The  Cyprus confiscation of deposits is just a setup to manufacture consent for a zero interest rate policy on bank deposits and government debt in the US and Europe. Better to break even than lose, even though monetary inflation eats up your capital.

Zero interest rates will penalize pension funds and require that they recalculate payouts downwards, a vital step in reducing the velocity of the expanded monetary base, hence staving off price inflation.

 

Thu, 03/28/2013 - 10:33 | 3385284 tarsubil
tarsubil's picture

The debt addicts are being strung along. But this game can get messy.

Thu, 03/28/2013 - 10:27 | 3385250 tango
tango's picture

I am still amazed that "experts" think determining value by fiat vs market will lead to prosperity.   Yes, the zero rate is absurd but then a government entity buying US debt and "loaning" it to the government with the proviso that it be repaid with interest despite trillion dollar annual debts is more idiotic. Pension funds can't be saved.  Just to break even they (CALPR) would need a return of 14% for six straight years.  Omstead,they will do what they do best - fleece the taxpayers.   Don't look for any downward revision of payouts. Why should any Dem state official in CA, IL, MD, NH or NY do anything knowing they will be automatically reelected?

Thu, 03/28/2013 - 16:36 | 3386681 LawsofPhysics
LawsofPhysics's picture

" a government entity buying US debt and "loaning" it to the government"  - The Federal Reserve Bank is not a government entity.  It's a private bank moron.  Just like any other private bank it serves the interests of it's shareholders, not you.

Thu, 03/28/2013 - 09:59 | 3385128 G_T_A_44
G_T_A_44's picture

There are no greater risks in banks as those of the US Fab Four whom hold $300+TT(and perhaps much more than disclosed) in notional OTC Derivatives.

 

The US is 10X Greece.

 

While Europe; Japan and the UK remain disasters waiting in the wings, the top US money center banks pose risks unseen in history.

 

The entire global financial structure remains bedridden; induced with morphine; comatose in the I.C.U. ward with no pulse nor brain waves.

Thu, 03/28/2013 - 09:56 | 3385113 LawsofPhysics
LawsofPhysics's picture

How long before this analysis also applies to U.S. bank depositors?    < chuckle, chuckle >  Tell us Reggie, can this happen to banks in the Cayman islands?  That is the real questions here.  That is where all the wealthy Americans hide their billions (in order to avoid paying taxes that support the services they enjoy).  That's the analysis I'd really like to see.

Thu, 03/28/2013 - 13:31 | 3385910 Arthur
Arthur's picture

If you have real money and decent laywers/accountants you should  merely have a shell corporation/trust in the caymans or Cook Islands, you don't really want your money there.

The problem is if you "only" have a few million it is really hard justify the cost of such a complicated set up.  Good way to keep assets out of the hands of creditors too.

Thu, 03/28/2013 - 10:15 | 3385212 tango
tango's picture

Why write as if shielding one's assets was a nefarious action?  Every time you buy a security with foreign holdings you are doing the same thing.  The LAST reason folks bank in the Caymans is to avoid "paying" for the "services" they "enjoy".  It is a matter of privacy, security and a hope that the Cyprus incident will not become routine, something I see as increasingly unlikely as folks withdraw funds from banks. 

Thu, 03/28/2013 - 16:18 | 3386595 dontgoforit
dontgoforit's picture

...but you can't withdraw your fiat in gold...so WTF do you do?

Thu, 03/28/2013 - 16:17 | 3386593 dontgoforit
dontgoforit's picture

...but you can't withdraw your fiat in gold...so WTF do you do?

Thu, 03/28/2013 - 11:16 | 3385413 LawsofPhysics
LawsofPhysics's picture

Bullshit.  I'll admit I bank there and it has certain tax benefits, yet I enjoy a very nice public school system for my children, an excellent police force, and very responsive fire/paramedic unit around the corner.  Don't be a dickhead hypocrit if you can't at least admit to it.  Tell me dipshit, do you also repair the roads that your business in America enjoys?  Again, I admit that I ship our produce on these roads everyday.  Disingenuous fuck.  No matter, like myself, you will bring some of that capital back home to pay for your personal security team in the future. 

Thu, 03/28/2013 - 14:37 | 3386130 NotApplicable
NotApplicable's picture

Wait, yer a farmer?

Thu, 03/28/2013 - 16:26 | 3386624 LawsofPhysics
LawsofPhysics's picture

Farming almost 35,000 acres.  I understand "diversification" on many levels.  Don't think you can count on banks?  The weather is even less dependable.

Thu, 03/28/2013 - 09:48 | 3385098 BurningFuld
BurningFuld's picture

Hey not if you are in Canada. We have gone to all plastic money so when the SHTF we will be able to make nice lamp shades. Ha!

Thu, 03/28/2013 - 14:35 | 3386124 NotApplicable
NotApplicable's picture

But I thought that stuff melts.

Thu, 03/28/2013 - 16:17 | 3386587 dontgoforit
dontgoforit's picture

It'll burn like 20,000 btu's.

Thu, 03/28/2013 - 10:31 | 3385270 Mototard at Large
Mototard at Large's picture

Plastic money eh?  Made by Securency in Australia. Nine of their executives were arrested for fraud and bribery and are now standing trial.  It almost makes you think that there could be corruption in the money business!

http://blogs.wsj.com/corruption-currents/2012/08/20/judge-slams-securency-culture-in-sentencing-of-former-cfo/

Thu, 03/28/2013 - 09:41 | 3385067 joak
joak's picture

"Your Mattress Is Starting To Look Awfully Attractive"

Hahaha ! But Reggie, I tend to sweat a lot, can it alter the validity of the bank notes ?

Thu, 03/28/2013 - 11:04 | 3385386 auric1234
auric1234's picture

My bank notes are heavy, yellow and shiny.

 

Thu, 03/28/2013 - 19:28 | 3387133 mt paul
mt paul's picture

Question please.....

 

when are the BRICS

going to open a new bank

for international trade 

 

next week....??

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