Protect Your Savings - ECB Proposes End To Deposit Protection

Protect Your Savings With Gold: ECB Propose End To Deposit Protection

- New ECB paper proposes 'covered deposits' should be replaced to allow for more flexibility
- Fear covered deposits may lead to a run on the banks
- Savers should be reminded that a bank's word is never its bond and to reduce counterparty exposure
- Physical gold enable savers to stay out of banking system and reduce exposure to bail-ins

EU deposit protection scheme

It is the 'opinion of the European Central Bank' that the deposit protection scheme is no longer necessary:

'covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.'

To translate the legalese jargon of the ECB bureaucrats this could mean that the current €100,000 (£85,000) deposit level currently protected in the event of a bail-in may soon be no more.

But worry not fellow savers as the ECB is fully aware of the uproar this may cause so they have been kind enough to propose that:

"...during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

So that's a relief, you'll only need to wait five days for some 'competent authority' to deem what is an 'appropriate amount' of your own money for you to have access to in order eat, pay bills and get to work.

The above has been taken from an ECB paper published on 8 November 2017 entitled 'on revisions to the Union crisis management framework'.

It's 58 pages long, the majority of which are proposed amendments to the Union crisis management framework and the current text of the Capital Requirements Directive (CRD).

It's pretty boring reading but there are some key snippets which should be raising a few alarms. It is evidence that once again a central bank can keep manipulating situations well beyond the likes of monetary policy. It is also a lesson for savers to diversify their assets in order to reduce their exposure to counterparty risks.

Bail-ins, who are they for?

According to the May 2016 Financial Stability Review, the EU bail-in tool is 'welcome' as it:

...contributes to reducing the burden on taxpayers when resolving large, systemic financial institutions and mitigates some of the moral hazard incentives associated with too-big-to-fail institutions.

As we have discussed in the past, we're confused by the apparent separation between 'taxpayer' and those who have put their hard-earned cash into the bank. After all, are they not taxpayers?

This doesn't matter, believes Matthew C.Klein in the FT who recently argued:

Bail-ins are theoretically preferable because they preserve market discipline without causing undue harm to innocent people.

Ultimately bail-ins are so central banks can keep their merry game of easy money and irresponsibility going. They have been sanctioned because rather than fix and learn from the mess of the bailouts nearly a decade ago, they have just decided to find an even bigger band-aid to patch up the system.

'Bailouts, by contrast, are unfair and inefficient. Governments tend to do them, however, out of misplaced concern about “preserving the system”. This stokes (justified) resentment that elites care about protecting their friends more than they care about helping regular people.' Matthew C. Klein

But what about the regular people who have placed their money in the bank, believing they're safe from another financial crisis? Are they not 'innocent' and deserving of protection?

When Klein wrote his latest on bail-ins, it was just over a week before the release of this latest ECB paper. With fairness to Klein at the time of his writing depositors with less than €100,000 in the bank were protected under the terms of the ECB covered deposit rules.

This still seemed absurd to us who thought it questionable that anyone's money in the bank could suddenly be sanctioned for use to prop up an ailing institution. We have regularly pointed out that just because there is currently a protected level at which deposits will not be pilfered, this could change at any minute.

The latest proposed amendments suggest this is about to happen.

Why change the bail-in rules?

The ECB's 58-page amendment proposal is tough going but it is about halfway through when you come across the suggestion that 'covered deposits' no longer need to be protected. This is determined because the ECB is concerned about a run on the failing bank:

If the failure of a bank appears to be imminent, a substantial number of covered depositors might still withdraw their funds immediately in order to ensure uninterrupted access or because they have no faith in the guarantee scheme.

This could be particularly damning for big banks and cause a further crisis of confidence in the system:

Such a scenario is particularly likely for large banks, where the sheer amount of covered deposits might erode confidence in the capacity of the deposit guarantee scheme. In such a scenario, if the scope of the moratorium power does not include covered deposits, the moratorium might alert covered depositors of the strong possibility that the institution has a failing or likely to fail assessment.

Therefore, argue the ECB the current moratorium that protects deposits could be 'counterproductive'. (For the banks, obviously, not for the people whose money it really is:

The moratorium would therefore be counterproductive, causing a bank run instead of preventing it. Such an outcome could be detrimental to the bank’s orderly resolution, which could ultimately cause severe harm to creditors and significantly strain the deposit guarantee scheme. In addition, such an exemption could lead to a worse treatment for depositor funded banks, as the exemption needs to be factored in when determining the seriousness of the liquidity situation of the bank. Finally, any potential technical impediments may require further assessment.

The ECB instead proposes that 'certain safeguards' be put in place to allow restricted access to deposits...for no more than five working days. But let's see how long that lasts for.

Therefore, an exception for covered depositors from the application of the moratorium would cast serious doubts on the overall usefulness of the tool. Instead of mandating a general exemption, the BRRD should instead include certain safeguards to protect the rights of depositors, such as clear communication on when access will be regained and a restriction of the suspension to a maximum of five working days by avoiding a cumulative use by the competent authority and the resolution authority.

Even after a year of studying and reading bail-ins I am still horrified that something like this is deemed to be preferable and fairer to other solutions, namely fixing the banking system. The bureaucrats running the EU and ECB are still blind to the pain such proposals can cause and have caused.

Look to Italy for damage prevention

At the beginning of the month, we explained how the banking meltdown in Veneto Italy destroyed 200,000 savers and 40,000 businesses.

In that same article, we outlined how exposed Italians were to the banking system. Over €31 billion of sub-retail bonds have been sold to everyday savers, investors, and pensioners. It is these bonds that will be sucked into the sinkhole each time a bank goes under.

A 2015 IMF study found that the majority of Italy’s 15 largest banks a bank rescue would ‘imply bail-in of retail investors of subordinated debt’. Only two-thirds of potential bail-ins would affect senior bond-holders, i.e. those who are most likely to be institutional investors rather than pensioners with limited funds.

Why is this the case? As we have previously explained:

Bondholders are seen as creditors. The same type of creditor that EU rules state must take responsibility for a bank’s financial failure, rather than the taxpayer. This is a bail-in scenario.

In a bail-in scenario the type of junior bonds held by the retail investors in the street is the first to take the hit. When the world’s oldest bank Monte dei Paschi di Siena collapsed ordinary people (who also happen to be taxpayers) owned €5 billion ($5.5 billion) of subordinated debt. It vanished.

Despite the biggest bail-in in history occurring within the EU, few people have paid attention and protested against such measures. A bail-in is not unique to Italy, it is possible for all those living and banking within the EU.

Yet, so few protests. We're not talking about protesting on the streets, we're talking about protesting where it hurts - with your money.

Read well, protest loudly and trust what you know and not just what you are told.

As we have seen from the EU's response to Brexit and Catalonia, officials could not give two hoots about the grievances of its citizens. So when it comes to banking there is little point in expressing disgust in the same way.

Instead, investors must take stock and assess the best way for them to protect their savings from the tyranny of central bank policy.

To refresh your memory, the ECB is proposing that in the event of a bail-in it will give you an allowance from your own savings. An allowance it will control:

"...during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

Savers should be looking for means in which they can keep their money within instant reach and their reach only. At this point physical, allocated and segregated gold and silver comes to mind.

This gives you outright legal ownership. There are no counterparties who can claim it is legally theirs (unlike with cash in the bank) or legislation that rules they get first dibs on it.

Gold and silver are the financial insurance against bail-ins, political mismanagement, and overreaching government bodies. As each year goes by it becomes more pertinent than ever to protect yourself from such risks.


Related content

Invest In Gold To Defend Against Bail-ins

Precious Metals Are “Best Defence” Against Bail-ins In Economic Crisis

Bail-Ins Coming To Italy? World’s Oldest Bank “Survival Rests On Savers”

News and Commentary

Pound ‘pounded’ by political uncertainty, Gold steady (FX Street)

Gold prices steady as dollar holds up on higher U.S. bond yields (Reuters)

Dalio's Bridgewater Boosts Gold Holdings in SPDR, iShares (Bloomberg)

Nothing to See Here as Gold Held in Tightest Range in Four Years (Bloomberg)

U.S. runs $63 billion budget deficit in October (Reuters)

Junk-bond investors are getting jittery – do they know something we don’t? (Moneyweek)

Global Gold Investment Demand To Overwhelm Supply During Next Market Crash (Gold Eagle)

"Banks Are Rigging All Markets" (US Watchdog)

Internet Crackdown Begins: Senator Al Franken Wants Google, Facebook, & Twitter Censor Political Speech (Zerohedge)

Here’s how to tell if property prices are crazy – or not (SCH)

Gold Prices (LBMA AM)

14 Nov: USD 1,273.70, GBP 972.47 & EUR 1,086.59 per ounce
13 Nov: USD 1,278.40, GBP 977.59 & EUR 1,097.89 per ounce
10 Nov: USD 1,284.45, GBP 976.44 & EUR 1,102.19 per ounce
09 Nov: USD 1,284.00, GBP 980.98 & EUR 1,106.29 per ounce
08 Nov: USD 1,282.25, GBP 976.82 & EUR 1,105.43 per ounce
07 Nov: USD 1,276.35, GBP 970.92 & EUR 1,103.28 per ounce
06 Nov: USD 1,271.60, GBP 969.72 & EUR 1,095.61 per ounce

Silver Prices (LBMA)

14 Nov: USD 16.94, GBP 12.92 & EUR 14.45 per ounce
13 Nov: USD 16.93, GBP 12.93 & EUR 14.53 per ounce
10 Nov: USD 17.00, GBP 12.92 & EUR 14.60 per ounce
09 Nov: USD 17.10, GBP 13.03 & EUR 14.69 per ounce
08 Nov: USD 17.00, GBP 12.96 & EUR 14.65 per ounce
07 Nov: USD 17.01, GBP 12.95 & EUR 14.70 per ounce
06 Nov: USD 16.92, GBP 12.90 & EUR 14.59 per ounce

Recent Market Updates

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- Russia Buys 34 Tonnes Of Gold In September
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Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.


east of eden Nov 14, 2017 5:53 PM Permalink

Okay. So the solution is prett simple. Just gather up a gang of sbout 10, 2 to cover the front door outside, 2 to cover the door inside, and the other 6 to do the work.Go for the mangers, CEO's and executives - anything in a suit, and anybody else that gets in the way.Then move on to the houses of parliament. Round them all up, and have a big bon fire, for the special guests. 

JBPeebles Nov 14, 2017 5:23 PM Permalink

How best to react when the implicit guarantee offered by Central Banks doesn't come true? We're seeing a similiarty to the 2007-8 period. We don't know what will be different about the next crisis only that it will come.Bank runs pose a big risk as the Italian banking situation shows. Surely you remember RBS and the storm back in '08. The banks were at that time fully engaged in the casino, when they failed at the tables Big Daddy Fed offered them a limitless line of credit. Some $15 trillion was dispensed as the Fed became the buyer of last resort, a scenario that could repeat in Europe if enough depositors demand their cash back.The shakier the financial foundation, the greater the impact when the markets correct. Counterparty risks zooms to the point low quality debt becomes illiquid. Bank reserves have grown since the last crisis, and perhaps some proactive increases in capital reserve requirements have softened the scale of the next intervention, though it's a systematic problem--weak banking regulation and moral hazard--associated with the implicit guarantee that guarantees the need to bail out banks again.Unlike '07-8, central banking authorities appear to be trying to pull back from the prospect of offering bailouts unconditionally into a bail-in approach where banks are free to raid customer deposits. This may be an indirect effort to reduce moral hazard which is the presumption certain banks are Too Big To Fail and are backstopped by the ECB.No amount of liquidity can correct a systemic issue. The bailouts will occur again and again if the banks get weaker and weaker due to an absence of buyers for their increasingly worth-less debt. Yes, they can issue debt to each other, in a process called private money creation, but Bank A borrowing from Bank B to infinity only works as long as there's a central bank to buy the crap. Don't expect the banks in Europe or here to honor deposits they simply don't have.Remember the fractional reserve banking system which lets banks inflate their profits does so at the expense of adequate capitalization and heightened specualtive risk through leverage exposure. Remember also that every newly created dollar, as representing underlying debt, bears with it an ongoing cost of interest that grows over time, increasing interest rate risk as well as fiscal dangers with growing budget deficits which have long been outside EU-mandated but unenforced levels expressed as a % of GDP.Gold bought and sold as a paper derivative is  similarly exposed to counterparty risk as we know the bullion banks don't have the actual physical metals to collateralize anywhere near the level of their obligations, meaning the TBTF presumption ultimately explodes counterparty risk absent a block chain or physical possession. The bigger the bank, the more the arrogance and greater the moral hazard. 

E. Phil Chew Nov 14, 2017 4:33 PM Permalink

This is the same group of Euroweenietrash that are officially banning all cash transactions by the end of 2018, yes ?If so...... Nada para ver aqui, maing.  Nudge.  Move along.  These are not the Totalitarians you are looking for.

skeelos Nov 14, 2017 3:19 PM Permalink

 So what?In the US, the poor have EBTs not bank accounts, and the banks and their .gov minions are doing eveything they can to turn the middle class into the poor.  It's not like there is an overabundance of positive net worth among the unwashed masses of debt slaves that needs to be protected.  Any positve net worth is tied up in housing and/or a 401k, and they're coming for that pile of cash to be sure. 

Herdee Nov 14, 2017 2:42 PM Permalink

There should never be any form of banking insurance except one and that's gold bullion and silver. Every time you deposit the bank should have a gold or silver account online for you as well. The choice should be given to the customer at his or her choice as to what percentage of the deposit(if any) should be immediately converted into gold bullion or silver. The most important thing is that the gold and silver bought hrough the bank be stored outside the banking system and not in a safety deposit box because of current government bail-in legislation in western countries. It is common in China for everybody to have a precious metals account. Again, stored outside the banking system and classified as ALLOCATED. Not unallocated. You do not own unallocated.…

Adullam Nov 14, 2017 5:13 PM Permalink

There is only one "competent authority" when it comes to saving, investing, spending your money. That is you. Not a nameless, faceless bureaucrat whose salary is paid in part or in whole with your money, either through taxes or your savings.

CoCosAB Nov 14, 2017 1:02 PM Permalink

" 'competent authority' to deem what is an 'appropriate amount' of your own money" This is the problem with dumb slaves! They PERSIST IN BELIEVING that the paper-money is theirs! It's not... The OWNERS only lend it to slaves in order to create the ILLUSION that dumb slaves are free and can make choices!

joak CoCosAB Nov 15, 2017 3:15 AM Permalink

This article is full of mistakes, even manipulative. Fake news. For example :"An effective pre-resolution moratorium needs to have the broadest possible scope in order to allow for a timely reaction to liquidity outflows. The general exception for covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility. Under that approach, the competent authority could, for example, allow depositors to withdraw a limited amount of deposits on a daily basis consistent with the level of protection established under the Deposit Guarantee Schemes Directive (DGSD)34, while taking into account potential liquidity and technical constraints. Certain safeguards to protect the rights of depositors should be put in place, such as a clear communication on when access to deposits would be restored. Finally, possible implications under the DGSD should be assessed, as the pre-resolution moratorium tool would not be useful if it were to be deemed to trigger the unavailability of deposits under the DGSD"Including covered deposits in moratorium scope or cancelling the scheme, it"s not the same. Still, GoldCore makes the shortcut. They conveniently removed some text to support their narrative. Bad.

In reply to by CoCosAB

Manthong ReturnOfDaMac Nov 14, 2017 2:41 PM Permalink

  WTF is the real news here? The G-20 and US removed the silos between deposits and bank gambling money at least  couple of years ago…. IT IS NOT YOUR MONEY IF IT IS IN A BANK.
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  This is how the bankers have confused everybody into not understanding their thievery definitions of "assets" and "liabilities".... It is totally upside-down. 

In reply to by ReturnOfDaMac