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MUST READ:Global Bail-In Plan Could Still Leave Taxpayers Holding the Bag
American Banker ^ | MAR 4, 2015 10:00am ET | CHRISTOPHER WHALEN

Posted on 03/10/2015 6:03:55 PM PDT by RaceBannon

BEWARE OF THE BAIL_IN The Government tells the banks to grab your assets to fill their coffers when they are insolvent, the way they took GREECE money The Banks are going to call YOUR money UNSECURED DEBT Now, Look at the first paragraph:

TOPICS: Government; Politics; Reference; Society
KEYWORDS: alexistsipras; bailin; bankaccounts; bankdeposits; debt; derivatives; doddfrank; europeanunion; fsb; greece; siezure; syriza; tlac; unsecureddebt
Global financial regulators have taken a fresh gambit at avoiding future bank bailouts with a recently announced proposal for total loss-absorbing capacity requirements. The Financial Stability Board's plan would require banks to accumulate enough combined capital and long-term unsecured debt to go through a resolution process without relying on taxpayer dollars.

But while some people view the TLAC proposal as a practical alternative to government support, my colleagues at Kroll Bond Rating Agency and I respectfully disagree. While well intended, the plan will not preclude future bank failures or the tendency of governments to rescue large financial institutions. Indeed, even if TLAC requirements are fully implemented, they will only go part of the way in keeping a failed institution’s liabilities from translating to a liability for the sponsoring government.

The FSB's plan supports a bail-in strategy, whereby shareholders and even debt holders would responsible for sharing the losses in the event of a bank downturn. Therefore in combination with other regulatory initiatives, it aims to promote greater market discipline, incentivizing creditors to enhance their monitoring of global systemically important banks' risk-taking.

But the proposal does not address the political issues and real-world concerns at the heart of the TBTF issue, such as over-the-counter derivatives and related counterparty risk. Nor does increased capital address the core issues behind the 2008 market breakdown, including liquidity risk, a lack of adequate public disclosure and securities fraud related to “off-balance-sheet” financing.

The OTC derivatives market has been one of the primary reasons that global regulators have been reluctant to liquidate G-SIBs and remains so today. U.S. law provides for the continued payment of OTC derivatives contract even after a depository is declared insolvent, owing to concerns about systemic risk. Over the past two decades, OTC derivatives have been given priority over other creditors to ensure that the failure of one institution does not create a chain of defaults affecting entire markets.

But this provision assumes that the failed bank has the resources and intention to make payments. If this is not the case, it appears the responsible governments would be forced to subsidize payments to the derivatives counterparties in order to avoid financial Armageddon.

Under the Dodd-Frank resolution authority, the FDIC has just 24 hours to reaffirm the OTC derivatives contracts of a failed bank or financial institution. If the FDIC uses its receivership power to repudiate the OTC contracts, however, then the OTC counterparties of the insolvent bank may then declare an event of default and can seize any available collateral behind these contracts, triggering a systemic run on liquidity a la Lehman Brothers.

One of the chief questions that regulators have yet to answer is how to impose losses on a major bank without triggering an event of default affecting the bank’s OTC derivatives book. The increased capital envisioned by TLAC does not address how to resolve the huge OTC derivatives positions of a major bank. The OTC derivatives books of JPMorgan or Citigroup, for example, are orders of magnitude larger than the banks themselves.

Moreover, if TLAC is adopted, the cost of complying with the new capital-raising requirements will be substantial. The long-term debt called for under TLAC will carry terms that are decidedly unattractive to traditional investors in investment-grade debt. Holders of TLAC debt will effectively be required to convert their investment into equity when regulators so require. Just who, precisely, will buy such a debt instrument? And at what yield? Regulators have not thought through how to convince investors to buy debt that has characteristics of equity.

And although the FSB hopes to encourage an equitable and standardized TLAC approach across international borders, the standards would surely vary across countries. There remains a basic lack of coordination among the industrial nations when it comes to prudential supervision of banks and markets. Unless all international banks face the same capital requirements, regulators risk making the competitive landscape even more uneven than it is today.

Regulators are taking steps in the right direction as they work to avert future bailouts. But one of the key factors behind the continuation of TBTF is a bilateral OTC derivatives market that places derivatives counterparties ahead of the other creditors of large banks. Until regulators and elected officials recognize this, the problem of how to liquidate insolvent banks will remain.

Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency, where he is responsible for financial institutions and corporate ratings. He is co-author of the new book Financial Stability: Fraud, Confidence & the Wealth of Nations. Follow him on Twitter at @rcwhalen.

1 posted on 03/10/2015 6:03:55 PM PDT by RaceBannon
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To: RaceBannon

Taxpayers always wind up holding the bag on anything politicians do ...

2 posted on 03/10/2015 6:05:25 PM PDT by SkyDancer (I Was Told Nobody Is Perfect But Yet, Here I Am ...)
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To: RaceBannon

“would require banks to accumulate enough combined capital”

Stress tests all past last week with flying colors. Right when gestapo body mortgage care begins it’s full enforcement. No coincidence. Who holds the equity in these so called “banks”

3 posted on 03/10/2015 6:12:28 PM PDT by Varsity Flight (Extortion-Care is is the Government Work-Camp: Arbeitsziehungslager)
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To: RaceBannon
The Banks are going to call YOUR money UNSECURED DEBT

This is just the opposite of which way I was taught to think of bank deposits.

I taught to think of bank deposits as individuals loaning money to the bank and the bank as paying interest to the depositors on the loaned money.

4 posted on 03/10/2015 6:20:05 PM PDT by Pontiac (The welfare state must fail because it is contrary to human nature and diminishes the human spirit.)
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To: RaceBannon

I am not a banking expert, but I caught something similar (or exactly the same) as this back in the 1970’s at a STATE Bank in Cibolo, TX. Back then, if you had a checking account, the (State) bank required you to sign a “signature” card. Well, that was their first lie, it wasn’t a document whose sole use was signature verification, but it was the operational contract between the account holder and the bank. And in that document, one of the statements that you were agreeing to with your signature, was a statement to the effect of: If the bank deems that it is insolvent, or that the account holder is becoming insolvent, the bank holder’s assets will be offset. I found a national bank to deal with. I later wised up and I now only deal with Credit Unions, which as a shareholder, I own.

5 posted on 03/10/2015 6:31:41 PM PDT by matthew fuller (The ONLY Democrat candidate is a felony flawed candidate!)
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To: RaceBannon

The bastards put us on the hook for more derivative disaster that was tucked inside the Criminalbus bill.

It’s past time for tar and feathers.

6 posted on 03/10/2015 6:31:47 PM PDT by Lurkinanloomin (Know Islam, No Peace - No Islam, Know Peace)
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To: RaceBannon

h/t poster Stackers @ zerohedge

Bail-ins are already part of the Dodd-Frank Act.

Title II - Orderly Liquidation Authority

” One final provision of importance is the ban of use of taxpayer funds to preserve a company that has been put into receivership under Title II. See 12 U.S.C. § 5394 (Dodd-Frank Act § 214). In essence, this provision prevents any future government bailouts for struggling financial institutions, no matter how big, or how impactful their failure might be. This provision makes it even more critical that a liquidation under Title II work quickly and effectively; without the safety net of federal bailout money, a failing financial institution will have no choice but to liquidate. “

” Claims are paid in the following order: (1) administrative costs; (2) the government; (3) wages, salaries, or commissions of employees; (4) contributions to employee benefit plans; (5) any other general or senior liability of the company; (6) any junior obligation; (7) salaries of executives and directors of the company; and (8) obligations to shareholders, members, general partners, and other equity holders. “

h/t poster teslaberry @zerohedge

Instead of following bankruptcy rules, frank dodd allows for lawful theft of creditors money normally called ‘deposits’.



h/t poster El Vaquero @ zerohedge

It’s theirs the moment you deposit it, as you become an unsecured creditor.

7 posted on 03/10/2015 6:41:13 PM PDT by PGalt
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To: SkyDancer

It will be rather interesting if they actually try it.

8 posted on 03/10/2015 6:51:44 PM PDT by eyeamok
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To: RaceBannon


9 posted on 03/10/2015 7:08:02 PM PDT by Pajamajan ( Pray for our nation. Thank the Lord for everything you have. Don't wait. Do it today.)
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To: Pajamajan

> The FSB’s plan supports a bail-in strategy, whereby shareholders and even debt holders would responsible for sharing the losses in the event of a bank downturn. Therefore in combination with other regulatory initiatives, it aims to promote greater market discipline, incentivizing creditors to enhance their monitoring of global systemically important banks’ risk-taking.

This is very dangerous territory they are heading into. A corrupt administration like the one we have now could draft legislation or policies with protocols requiring assets to remain above certain levels for the banks which if not met could result in forfeiture or being taken over and managed by another inept government agency. The FDIC already did this with thousands of banks across the U.S. as a result of the Fannie / Freddie Mac fiasco.

10 posted on 03/10/2015 7:29:19 PM PDT by jsanders2001
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To: matthew fuller

Remember that your Credit Union has to clear its checks through a bank. This means they have a bank account at some bank within the Federal Reserve System and those accounts would be at risk.

11 posted on 03/10/2015 8:27:21 PM PDT by Pete from Shawnee Mission
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To: Pete from Shawnee Mission

Thank you for that information, did not know that.

12 posted on 03/10/2015 8:36:27 PM PDT by matthew fuller (God put me on Earth to eradicate cancer and liberalism. I'm starting with liberalism.)
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13 posted on 03/10/2015 10:11:46 PM PDT by Faith65 (Isaiah 40:31)
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