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U.S. and UK Test Big Bank Collapse - Risk Of Bail-ins

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U.S. and UK Test Big Bank Collapse - Risk Of Bail-ins

Regulators from the U.S. and the UK are in a “war room” today conducting financial war games to see if they can cope with fall-out when the next big bank collapses, the two countries said on Friday according to Reuters.

Treasury Secretary Jack Lew and the UK's Chancellor of the Exchequer, George Osborne, on Monday will run a joint exercise simulating how they would prop up a large bank with operations in both countries that has landed in trouble.

Also taking part are Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney, and the heads of a large number of other regulators, in a meeting hosted by the U.S. Federal Deposit Insurance Corporation.

"We are going to make sure that we can handle an institution that previously would have been regarded as too big to fail. We're confident that we now have choices that did not exist in the past," Osborne said at the International Monetary Fund's annual meeting.

Six years after the financial crisis, politicians and regulators around the globe are keen to prove they have created rules that will allow them to let a large bank go under without spending billions in taxpayer dollars.

They have forced banks to ramp up equity and debt capital buffers to protect taxpayers against losses, and have told them to write plans that lay out how they can go through ordinary bankruptcy. The plans are so-called living wills.

Yet salvaging a bank with operations in several countries - which is the norm for most of the world's largest banks such as Deutsche Bank, Citigroup Inc and JPMorgan - has proven to be a particularly thorny issue.

Because the failure of a big bank is such a rare event, regulators may not be used to talking to each other. There have also been suspicions that supervisors would first look to save the domestic operations of a bank, and would worry less about units abroad.

The exercise comes as regulators are about to bring to fruition further initiatives to make banking safer.

The first would force banks to have more long-term bonds that investors know can lose their value during a crisis, on top of their equity capital, to double their so-called Total Loss-Absorbing Capacity (TLAC).

A second measure, expected to be announced this weekend, will force through a change in derivative contracts, which in their current form protect investors, and complicate the winding down of a bank across borders.

Gold in U.S. Dollars (Thomson Reuters)

It is now the case that in the event of bank failure, your deposits could be confiscated.
Let's be crystal clear: The EU, UK, the U.S., Canada, Australia and New Zealand all have plans for bail-ins in the event of banks and other large financial institutions getting into difficulty.

Are your deposits safe?

Are you prepared for Bail-Ins?

Special Report on Bail-ins Here

GOLDCORE MARKET UPDATE

Today’s AM fix was USD 1,228.00, EUR 969.14 and GBP 763.82 per ounce.
Friday’s AM fix was USD 1,222.25, EUR 964.38 and GBP 761.01 per ounce.
        
Gold and silver both remained unchanged on Friday at $1,223.70 and $17.35. Last week, gold and silver both climbed 2.7% and 3.2%, respectively.


Silver in U.S. Dollars (Thomson Reuters)

Gold jumped sharply in the early Asian trading Monday as a safe haven bid came into the market. Gold in Singapore rose as high as $1,235 an ounce prior to concentrated selling in London pushed prices lower again. At the open in London, gold climbed to $1,237.30 an ounce, near a 4 week high, prior to selling saw gold fall back to $1,225/oz. 

Last week gold bullion saw its largest weekly gain in 4 months as safe haven buying was seen due to concerns about the Eurozone and continuing ultra loose monetary policies.

Poor economic data from Europe, slow growth in China and concerns about Ebola have prompted investors to sell equities. Asian stocks stumbled to seven-month lows on today while crude oil prices were pinned near a four-year trough. Stocks in Dubai fell 6.5% on Sunday, the biggest drop in four months to bring the Dubai Financial Market General Index to its lowest level since July 20.
Gold is a proven hedging instrument and safe haven asset to riskier assets such as equities.
Last week the IMF cut its global economic forecast, and the U.S. Fed’s very dovish comments have made investors think that an interest rate hike is coming later than they expected. 
Fed officials also expressed concern over the global economy, which could further delay a rise in U.S. interest rates.

Most notably, Fed Vice Chairman Stanley Fischer said the effort to normalise radical U.S. monetary policy after years of extraordinary stimulus may be hampered by the global outlook.
A delay in raising interest rates is positive for gold, a non-interest-bearing asset, and negative for the dollar and other interest yielding assets.

Today, Japanese markets are closed and the U.S. and Canada will be partially, or fully, shut for holidays as well. 

Singapore launched physically-settled kilobar gold trading today or contracts for 25kg or 804 ounces each. Singapore has stated its intent to become an Asian gold hub with a goal of setting a regional benchmark price. The contract which expires tomorrow was priced at $39.685/gram at close of trade. The contracts trade at 830-1130 am Singapore time.

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Mon, 10/13/2014 - 15:36 | 5325336 moneybots
moneybots's picture

"Deflation has never been allowed to occur in any purely fiat currency system."

 

Japan has already been there- deflation, that is.  Burst bubbles are deflationary.  Kondrateiff Winter is deflationary.

Math doesn't care what is allowed, math just is.

Mon, 10/13/2014 - 15:31 | 5325315 Cosworth
Cosworth's picture

Over here in the UK bank deposit insurance has gone up from £85,000 to £1,000,000!!!! Something is brewing!!!!

Mon, 10/13/2014 - 15:10 | 5325191 hooligan2009
hooligan2009's picture

instead of bail ins, why not call them what they are? you are in the credit stack of a failied institution alongside others with similar claims and within the jurisdiction of the registered enitity?

bail in ..what a crock...you take a risk...you get nothing if you choose poorly. that is not a bail in, thats a free market.

Mon, 10/13/2014 - 13:49 | 5324756 no more banksters
no more banksters's picture

"... in such deregulation conditions, banksters will have the opportunity, not only to get away without paying a cent, in a potential banking crisis, but on the contrary, to gain from such a situation according various possible scenarios."

"... the pointless effort of the European authorities to put some rules in a system which has been deregulated by them, and which they continue to deregulate further, guided by the Greek crisis, for the benefit of the big capital, seems that makes banksters laugh again."

http://failedevolution.blogspot.gr/2013/07/why-banksters-laugh-with-rece...

Mon, 10/13/2014 - 13:26 | 5324662 skbull44
skbull44's picture

I'm a wee bit confused by the placement of Canada as number 4 in the 'Safe Bank' category given that bail-in plans have been made in Canada. See these: http://olduvai.ca/?p=21218; http://olduvai.ca/?p=10

And, Simon Black of Sovereign Man has posted that Canada has the worst capitalised central bank in the West. See this: http://olduvai.ca/?p=27314

So, how on earth can it be on the SAFE list?? Something is amiss...

 

 

Mon, 10/13/2014 - 13:23 | 5324660 lasvegaspersona
lasvegaspersona's picture

Hyper inflation (HI)  results in all cash and cash equivalents becoming worthless. Since the dollar and the whole system are on a HI course it doesn't make a whole lot of difference if perceived wealth is destroyed in some other way. The banking system could implode and wealth would be lost in that way.

Those who study HI expect there to be lots of higher prices and wheelbarrows full of cash in the streets. That is what usually happens. There could be other ways for the message 'you are not as rich as your bank account says you are' to be declared. Accounts could be seized and the value declared to be nil. This would have the same effect. One way or the other there is more wealth on paper than can be made real with goods and services. In today's world of huge derivatives that far exceed the values of equities and bonds and properties a glitch in that maket could overwhelm the system faster than HI usually happened in the past.

Deflation has never been allowed to occur in any purely fiat currency system. Since cash can merely be printed it always has been. HI is the result. I can't see the USA having bail-ins because that would destroy confidence in the reserve currency which would have the same result as HI. While it could happen I expect the usual course of increasing prices and the eventual destruction of the dollar. We should expect the rules to change as things become desperate however so we may see novel 'solutions' to the profound problems of our monetary system. Clearly the Fed has done extraordinary things already. While we know how this same situation has been dealt with in the past, visualizing our course, with new rules, is simply not possible to predict. I won't be surprised with an outcome that is 'completely different'...Monte Python may come to look normal in the neat future.

Mon, 10/13/2014 - 13:10 | 5324621 RaceToTheBottom
RaceToTheBottom's picture

It will be interesting how they think that they are going to produce a bail-in that:

1)  Does not have taxpayers pay for it

2)  Not go against the FDIC guarantee, I think it is still 250,000$US  in the US.

 

There is not and never will be enough money in the insurance pool to accomplish this

Mon, 10/13/2014 - 13:04 | 5324582 tarabel
tarabel's picture

 

 

This article has sanitized one of the best and most revealing parts of the whole affair.

Reading the Guardian article from yesterday, the money quote I took from it was that the British side was emphatic that these banks could be rescued without "bail-ins from the taxpayer".

What this told me was that:

a) bail-ins would be necessary in the event of a systemic failure (well, duh, right?)

b) the "taxpayer" would not be on the hook for the bail-in. (believe it or not)

Which leads me to conclude:

c) because bail-ins are required and taxpayer money is not going to be used, the whole exercise is for the purpose of modeling depositor bail-ins a la Cyprus.

Can't wait for the Newspeak communique to be issued upon conclusion of the no-doubt successful exercise.

Mon, 10/13/2014 - 12:45 | 5324488 Mire
Mire's picture

Nutz

Mon, 10/13/2014 - 12:43 | 5324475 Seasmoke
Seasmoke's picture

I think bail ins should be 100 % up to $1,000,000. Anyone with over $1 million gets to avoid the bail ins.

Mon, 10/13/2014 - 12:37 | 5324451 marathonman
marathonman's picture

You're money at the bank is just an unsecured loan to the 'bank'.  In the event their debt Ponzi collapses because a counter-party can't keep debt expanding on that exponential curve, all your years of toil and effort can dissappear into digital nothingness.  What a freaking system.

Mon, 10/13/2014 - 13:05 | 5324593 lasvegaspersona
lasvegaspersona's picture

Unless you save in gold.

Paper promises are the problem. Apparently a lot more have been printed than perform. It seems governments always do this because 'We the people' demand easier money (it makes debt easier to pay). Since this is a chronic human thing I suggest saving outside the banking system.

Mon, 10/13/2014 - 12:23 | 5324378 WOD
WOD's picture

In the old days, banks paid us interest.. now they charge us to 'manage' our bank accounts, and want us to pay-in to save them from their poor performance? Despicable!

Mon, 10/13/2014 - 12:22 | 5324373 Doubleguns
Doubleguns's picture

They can only pull this off once. Then then the bank runs begin......in earnest!!!!! 

Mon, 10/13/2014 - 13:08 | 5324607 tarabel
tarabel's picture

 

 

Already been pulled once in Cyprus and every civilized society has been going about the ordinary everyday business of crafting bail-in regulations for their own banks ever since. Banks runs don't work after bail-ins have been triggered. That's the whole idea-- to turn your Fritos corn chips into my Fritos corn chips.

Mon, 10/13/2014 - 13:01 | 5324572 KnuckleDragger-X
KnuckleDragger-X's picture

I wouldn't even bet on once this time around...

Mon, 10/13/2014 - 12:22 | 5324372 WhyWait
WhyWait's picture

Has anyone attempted to trace through how "bail-ins" will accelerate and propagate the economic collapse?  

Mon, 10/13/2014 - 14:30 | 5324977 hendrik1730
hendrik1730's picture

The same way as the Weimar/Zimbabwe/Venezuela inflations destroyed their economies. Massive unemployment, using foreign currency ( if THOSE still are carrying some worth ), growing your own veggies and bartering.

Mon, 10/13/2014 - 12:59 | 5324560 KnuckleDragger-X
KnuckleDragger-X's picture

You can calculate mathematical risk but not psychological risk. How will they handle a panic is the big question and just to make it more interesting is different countries have different psychology's. No good answers but many, many bad ones.

Mon, 10/13/2014 - 14:07 | 5324826 WhyWait
WhyWait's picture

"You can calculate mathematical risk but not psychological risk."

True. Maybe details don't matter any more.  

But here's one that someone who knew how to find the data could calculate: What percent bail-in would it likely be?  How long would the accounts likely be frozen for? And based on those assumptions - and panic aside - how many payrolls for how much would go unpaid if AOL or CitiBank did a bail-in of X percent, and what would the economic impact of that be?  

Firms rushing to draw payroll money from other accounts could kick-start the run even if the public as a whole doesn't panic.

Mon, 10/13/2014 - 12:24 | 5324384 Doubleguns
Doubleguns's picture

Whywait I believe it will start the bank runs. In the EZ all the cash has been used to buy junk bonds from each other. 

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