The Dijssel-Bomb

Sprott Group's picture

Eric Sprott and David Franklin

 This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, “serve as a model for dealing with future banking crises.1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as ‘the template’; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits. 

In their recently published paper A Template For Recapitalising Too-Big-To-Fail Banks, authors Paul Melaschenko and Noel Reynolds argue for a “simple” mechanism to recapitalize failed banks without the use of taxpayers' money. They propose a process whereby a bank, if it reached the point of failure, could transfer ownership to a newly created holding company over a weekend and be recapitalized. The bank would then be sold, enabling the market to determine the ultimate losses to previous equity holders and creditors. And, yes, this scenario includes losses for depositors above a guaranteed limit. Presto! A new bank with a clean balance sheet, ready to receive liquidity support from the prevailing central bank, without the need for handouts, bailouts, TARP programs, or any other form of government assistance. Previous debt and equity holders and depositors of this failed bank would be left with an equity position in the new entity. This ‘template’ would ensure that “shareholders and uninsured private sector creditors (read: depositors and bond holders) of such banks, rather than taxpayers, bear the cost of resolution.2 While at the moment this framework is only outlined in a discussion paper, it confirms our suspicions. While the old template involved “bailing out” banks through the transfer of toxic assets from the corporate sector to the taxpayer, the new template calls for “bailing in”. In this model the risk is contained within the affected institution at the expense of equity holders, bond holders and finally depositors. Far from being an idle comment, the unscripted 'bomb' that Mr. Dijsselbloem dropped on the market during the Cyprus Banking crisis is on its way to becoming a reality across Europe and other major banking centers.

In our opinion, the problem with the banks stems from an over-levered banking system that still has not been brought under control. Traditionally, banks would “de-lever” by selling portions of their loan portfolios to other banks, but since 2008, this hasn’t happened in most instances and leverage has remained elevated. In fact, an example of a bank bail-out” that highlights the over-leverage still plaguing the system, happened recently in Mr. Dijsselbloem’s own back-yard. In this instance, the Netherlands nationalized SNS Reaal, a banking and insurance group, in a $14 billion rescue that highlights the continued fragility of the European banking sector.

From The Wall Street Journal:

The government rescue was inevitable after SNS Reaal suffered a run on deposits and failed to raise capital on its own. It is worrisome. Nearly the entire Dutch banking system is now on a government lifeline, said Arnoud Boot, a professor of corporate finance at the University of Amsterdam. The Dutch state will inject €2.2 billion ($2.99 billion) into the company, write off €800 million from an earlier bailout and €700 million on the value of SNS Reaal's toxic property loans. It will also provide an additional €6.1 billion in loans and guarantees to put the firm on a sound footing. The burden to taxpayers will be eased somewhat through a €1 billion contribution from the other Dutch banks through a special levy.3

Can you see the pattern? Depositor runs triggered a bailout of an over-levered institution, leading to a write-off of toxic assets, additional lending and guarantees by the government. All of this committed to by Mr. Dijsselbloem on behalf of the Dutch people. This will likely be the last time we see a rescue in this fashion, for now we have a new ‘template’ whose prima facie case was Cyprus. It is interesting to note that, to the best of our knowledge, there was no discussion of “bail-ins” for Dutch depositors of SNS Reaal.

It is clear now that the crossing of the Rubicon into the confiscation of depositor funds was not a one-off emergency measure limited to Cyprus. We can only speculate as to what triggered these new rules. Perhaps the public would no longer tolerate the use of taxpayer-funds to effect bailouts of banks? Maybe this is the beginning of an attack on offshore banking havens? Or possibly the regulators are hoping to impose some market discipline on the banks, forcing depositors to review bank balance sheets before opening an account. Regardless of motivation this is a game changer.

So what is the impact of this ‘template’ for investors? By law, when you put your money into a deposit account, your money becomes a liability of the bank. Above an insured amount, you become an ‘unsecured creditor’ with a claim against the assets of a bank if it were to fail; your deposits are now pooled with other assets and divided amongst other creditors. We urge investors to consider any deposits above the insured amounts to be only as safe as the credit-worthiness and capital structure of the bank indicates. Only by understanding where you are in the creditor ‘pecking order’ will you avoid a ‘Dijssel-Bomb’ in the next phase of the on-going financial crisis.

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WTFUD's picture

Everything coming from these financial institutions, markets, politicians is one giant cesspool of fraud.
The game was up a long time ago and no matter how they want to dress it their delusional refusal to recognise that it's over is fucking pitiful.
No sane individual will ever volutarily participate in this charade again, EVER.

Middle_Finger_Market's picture

#Truewords. Let the dark age ensue. 

rlouis's picture

Thanks for the update.  EU bank leverage being 10x worse than ours makes watching this unfold like watching a NASCAR race...

the grateful unemployed's picture

emergency measures become policy (thinking permanent martial law soon)

Itgoestoeleven's picture

Take your money out of the banks and spend it on long term food stores and ammo! Stop talking and get shit done!

cynicalskeptic's picture

Purchases which will be tracked by government and confiscated during an 'emergency'.... not that ther's any ammo to buy but apparently gov is inquiring about 'preppers' who are stockpiling food (potential 'terrorists' you know....).  Saves more taxpayer money by passing out YOUR food to the unprepared when SHTF.

Amazing how government regularly gets things so very wrong and then penalizes those that prepared for that very same screw-up......

Shaten's picture

I have a better plan everyone has their accounts capped at the deposit gurantee level and transfer all those accounts to a holding bank for the depositors to decide where they want to go from there.

All remaing balanaces (above the gurantee), bond, holders everything gets transfered to a bankruptcy court to decide. If there was insignificant capatial to cover all the account balances up to the guarantee level that becomes the most senior creditor, followed by any deposits above the guarntee amount, then every thing else.

WTFUD's picture

@ shaten
'i have a better plan' , hang all the bankers at each institution and the major bondholders ( generally the banksters) divvy up their shareholdings and salaries then share the ill gotten loot amongst the depositors.

thestarl's picture

Typical comment from an arsehole thats never done an honests days work in his fucking life.

disabledvet's picture

so China's banking system collapses. hasn't it already? the Japanese variant would be a sight to behold! but...listen, gold, okay...but how about trying to create a debt market between Taiwan and the Mainland? this is a MASSIVE (yet risky) business venture (currently being tried by DB)...with the potential for tremendous profits if successful. Where's Wall Street in all of this? Where's the financial media? i'm sorry but the coverage in East Asia about "how a financially driven economy actually does work" is so vastly superior..."because that's where the economic activity is now." let alone the freedom of expression. i'm not turning into a bear on the market or the economy...but Wall Street looks to me to be poised for a "solid reversion to the mean" here as they've overextended themselves AGAIN in a mass of "illiquid assets."

DOT's picture

Hey SPROTT ditch the fucking stupid long disclaimer- makes you appear to be the same as the rest of the idiots.

Non Passaran's picture

He can't do that.
If you understood you wouldn't ask for it, but still here it is spelled out for you.

Jorgen's picture

Hey SPROTT ditch the fucking stupid long disclaimer- makes you appear to be the same as the rest of the idiots.

Even though it is hard to dispute the merit of Sprott's article, the lengthy disclaimer (~27% of the piece) makes it less valuable indeed

Forgiven's picture

First step, in any real bank resolution plan, should be to hang the officers and board of directors.  OK, that may be harsh sounding, but watch how many banks quickly start getting their ducks in a row.

RaceToTheBottom's picture

I am a firm believer of capital punishment for economic terrorists.  And Banksters and BOD have to be responsible for their firm's actions.  Contrary to mentally retarded justices beliefs, companies are not people and people responsible for the company must be held accountable for the companies actions.

LawsofPhysics's picture

No society or currency has ever died/collapsed because it's purchasing power became too strong.

Fuck the paper-pushers and their fiat, neither adds anything of real value to society anymore.

Let them both burn.

Boxed Merlot's picture

No society or currency has ever died/collapsed because it's purchasing power became too strong...


I'm not sure I see the downside to this.  If a person has enough liquid assets to allow them to sit idle, those assets are actually part and parcel of the institution in which they sit.  If that person decides not to take an active role in how they're managed, then they should suffer the consequence of failure, should it occur.

My question is what about the huge physical sums of cash sitting on deposit at the US fed in the form of US bank deposits?  These bales of cash are sitting idle at this point having been used in the intiial wash for the purchase of interest bearing US timmy bills, the cash now has no where to go but back to ben for his "safe keeping". 

Sure it represents "liquidity" in the event a cash run on his member banks occurs, but what happens if / when people realize the liquidity they're ingesting is sea water and only hastens their demise? 

LawsofPhysics's picture

please, they are printing billions in "cash" every fucking day.  Don't overthink this and remember one simple rule; when fruad is the status quo, possession is the law.

Boxed Merlot's picture

Don't overthink this...



But, but, what about the National Geographic documentary showing all that gold and cash and men with guns and trucks and big buildings with security cameras and,  and,    and...  ??? 

Notarocketscientist's picture


To President Barack Obama:

We call on you to ensure that whistleblower Edward Snowden is treated fairly, humanely and given due process. The PRISM program is one of the greatest violations of privacy ever committed by a government. We demand that you terminate it immediately, and that Edward Snowden be recognized as a whistleblower acting in the public interest -- not as a dangerous criminal.

cynicalskeptic's picture

Help government compile a listing of priority reservations for FEMA camps......

Non Passaran's picture

Why this petition? WTF? Who can possibly want this guy to go court?
Scrap that shit and put up a petition to impeach Obama.

Pinto Currency's picture



As investors pull their assets out of the over-levered banking system, it will become more levered.

Note also that D-Boom's comments in March seemed to be an important turning point to what is now the global scramble for physical gold.

Panicking will do you no good.

Unless you panic first.

Panafrican Funktron Robot's picture

Yeah, I had always been agnostic regarding what asset classes to invest in, so I had traditionally been 20% each in stocks, bonds, cash, gold, and real estate.  As of a couple of years ago I was basically completely divested of stocks/bonds and was in cash, gold, and real estate.  In light of Cyprus (along with finally cognating that FDIC was "insuring" $9.6 trln in deposits), cash is being rapidly divested into gold/RE.

Boxed Merlot's picture

cash is being rapidly divested into gold/RE...



RE is only as good as the host country's commitment to, or your personal connections to assurring the "rule of law", aka a "republic" form of government will prevail over "mob rule".  Interesting moments can occur when lamp posts and hunger meet the middlemen these people employ.


I apologize if this is over thinking, but trying to figure out how deeded mineral rights with proven reserves fits into the current situation kinda places one in a weird predicament.  jmo.

LawsofPhysics's picture

... and can remain solvent while everyone else panics.