Longtime reader James Gibson is author of the great book, “From West To East”. He also just sent us this terrific new article which discusses the history of the Cypriot bank bail-in of 2012 and warns of future bail-ins to come.
By James Gibson, TFmetals:
Most readers probably agree with me that the current international financial system is to all intents and purposes broken, and it is being kept afloat by increasingly egregious interventions and manipulations by central banks and major money centre banks. The risk of bank bail-ins seems to be rising by the month, so I thought an article on this subject might be of interest.
This topic is close to my heart, as I live in Cyprus and personally witnessed and lived through the experience of the first officially sanctioned G20 ‘bank bail-in’ process in 2013.
It became clear to me in late 2012 that the Cypriot banking sector had dug itself a huge financial hole, well beyond the national government’s financial ability to resolve, and that bank depositors’ money was very much at risk.
At every opportunity, I tried to warn friends and acquaintances of the dangers, and urged them to reduce their Cypriot bank deposits to a minimum as soon as practical. Most people either laughed off my concerns, or their eyes glazed over with total disbelief, and/or they thought I was a certifiably crazy person.
In the end, I managed to persuade just three people to take action, which they did literally in the last few days before the official declaration of a ‘bank holiday.’ They collectively saved over $1.5 million. It would be a masterly understatement to say that that those three people, and their families, were very relieved and happy that they had managed to avoid the financial consequences of the bail-in. It is interesting that I cannot recollect even one of those people that ignored my warnings ever approaching me after the bail-in, to express regret that they had refused to heed my warning. As the old adage goes: there is nothing stranger than folk.
When the bank holiday was declared, and the final bail-in terms agreed and made known, the depositors’ reactions were pretty uniform, and understandably included a deep sense of outrage, and stunned disbelief that their bank deposits could be legally seized in such an arbitrary manner.
This sense of outrage was exacerbated by the fact that the banks had regularly been declaring healthy profits in the years leading up to the bail-in, and there was little to indicate to those unfamiliar with the financial system, that there was any cause for concern.
What follows is brief extract from my book:
FROM WEST TO EAST – The Greatest Transfer of Power and Wealth in the History of Mankind
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?
After the bail-in, commercial businesses of all types found that suppliers, both local and international had cancelled their credit lines, even for long established business relationships. Almost overnight, importers and local businesses went from receiving anything between 30 days and 120 days to make payments for imports or local supplies, to having to pay for those goods upfront!
To add insult to injury, businesses, and individuals were being pressured by their banks to reduce and/or pay back their credit lines, as well as being requested to increase pledged collateral in support of their credit lines, because existing collateral values had been revised downwards by an appreciable percentage, in view of the financial crisis. Also bear in mind the fact those businesses, and their owners, had just seen a substantial percentage of their bank deposits confiscated by the bail-in.
In short, there was a sudden and dramatic cash squeeze.
The Cypriot banks were forced by the EU/IMF to significantly tighten up on all aspects of their lending practices. The impact on the local economy was immediate and not surprisingly, extremely negative.
Four years later the economy is showing some tentative signs of recovery. However, that tentative recovery will be short lived when, rather than if, the international financial system implodes again, as a result of the failure of TPTB to address the core issues that caused the 2008 crisis.
It therefore makes sense for people to make pragmatic preparations, according to their disposition, means and situation, so as to be able to ride out a widespread bank holiday of indeterminate duration. Such preparations, amongst others, might include having a suitable stash of cash on hand, water, canned and dry food stored at home, as well as physical gold bullion and/or silver bullion stored outside the banking system in a suitably secure vault and location.