The financial and economic crisis of 2008 resulted in many major banks requiring urgent increases in capital in order to avoid bankruptcy. In the highly stressed atmosphere of the crisis conditions existing at that time, coupled with the lack of any protocol to follow in such extraordinary circumstances, the banks in question were exceptionally provided with increased capital by their respective governments at the expense of the taxpayer.
When the crisis conditions calmed down somewhat in 2009, the G20 decided that a suitable protocol for handling future bank crises must be drawn up and agreed. In April 2009 the Financial Stability Board (FSB) was established as a successor to the Financial Stability Forum (FSF); it included all G20 countries, FSF members, and the European Commission. The FSB was based in Basel, Switzerland, the home of the BIS (Bank for International Settlements, the central bank of central banks).
The chairman appointed to head up the FSB was Mark Carney, who at the time was the governor of the Bank of Canada (Canada's central bank). The FSB was tasked with promoting financial stability within the global financial system and making suitable recommendations to the G20 in that regard.
As Carney had already been instrumental in the shaping of the provisions of a bank bail in policy for the Canadian chartered banks, it should be of little surprise that the FSB, in liaison with the IMF and the BIS, sought and received G20 approval to introduce formal bank bail in procedures as a means of restructuring distressed banks in any future bank crisis.
By the G20 adopting bank bail ins rather than bailouts, it got the taxpayer off the hook, but at the expense of any distressed banks' depositors.
The first bank crisis to occur after the bank bail in agreement was approved by the G20 was in Cyprus. A very brief timeline for the Cypriot bank crisis is provided below:
- 25 June 2012: Cyprus formally requests a bailout from the European Union.
- 24 November 2012: Cyprus announces it has reached a provisional agreement with the European Union for the bailout process, subject to the Cypriot banks being examined by EU officials (an approximate estimate of the capital needed was €17.5 billion).
- 25 February 2013: The Democratic Rally candidate Nicos Anastasiades wins the Cypriot government elections.
- 16 March 2013: Cyprus declares a bank holiday and announces the terms of the bank bail in: a 6.75 percent confiscation of accounts under €100,000 and 9.9 percent for accounts larger than €100,000.
- 17 March 2013: An emergency session of Parliament to vote on the bail in is postponed.
- 18 March 2013: The bank holiday is extended until 21 March 2013.
- 19 March 2013: The Cypriot Parliament rejects the bail in bill.
- 20 March 2013: The bank holiday is extended until 26 March 2013.
- 24 March 2013: Daily cash limits of €100 in ATM withdrawals are introduced.
- 25 March 2013: A bail in deal is agreed upon. Those depositors with over €100,000 lose 40 percent of their money in the Bank of Cyprus and lose 60 percent in Laiki Bank.
It's important to note the speed with which these events unfolded towards the end of the actual bail-in process.
The Cypriot banks formally requested a bailout back in June 2012. The subsequent bailout talks took several months; then, without warning, the Cypriot government declared a bank holiday after the fact. Thereafter, depositors could only make very limited cash withdrawals from ATMs in accordance with a government decree. The process was not gradual; it was sudden and total.
The primary concerns of the Cyprus Central Bank, bank CEOs, government ministers, and so on, were to (a) maintain depositors' confidence in the banking system right up to the last minute, and (b) to avoid a bank run, thereby ensuring the maximum amount of customer deposits possible were available to fund the actual bail in. That is why no prior warning of an impending bank holiday was provided.
Western banks are generally very highly leveraged, which means that many are unable to absorb much more than a 5 percent hit to their balance sheet without the need to recapitalise. In a time of financial crisis, many banks will run the risk of incurring losses of more than 5 percent of their assets, and taking into account their derivative exposure, their losses will quickly exceed that 5 percent threshold.
The MSM continue to assure the public that the 2008 financial and economic crisis is now firmly behind us; economic activity is picking up steadily, whilst unemployment is on the decline. However, many respected financial commentators in the alternative media of the blogosphere are firmly of the opinion that far from being in recovery mode, behind the scenes:
- Western banks are now in worse shape than they were in the lead-up to the 2008 crisis.
- Most of the Western economies are experiencing very sluggish economic growth, with some nations arguably in or approaching recession.
- Government debt levels are already excessive.
- Central bank balance sheets are awash with assets of very questionable quality as a result of the 2008 crisis.
Are bail ins coming to a bank near you?"