THE BLOG

Bail in Replacing Bail Out

03/03/2014 12:36 | Updated 03 May 2014

In a press release dated February the 19th addressing the so-called "single resolution mechanism" to be decided by the European institutions, the Council of the European Union stated, in what is perceived as a negotiation declaration towards the European Parliament, there was agreement between the partners that: "bail-in and not bail-out is the main guiding principle for bank resolution."

The international press refers to this guiding principle as a simple and fair way of dealing with future financial crises. As we seek to show in the following lines, this is clearly not the case.

The legal text of the directive on recovery and resolution agreed by the Council on the 18th December 2013 has received little attention whereas a parallel regulation on the same issue announced with big fanfare as heralding a new era of financial responsibility is still under discussion.

Both the European Central Bank (ECB) and the European Parliament have been repeatedly quoted expressing their misgivings on several aspects of this second bill as approved by the Council, but so-far no declaration questioned the "bail-ins" as main guiding principle, so we can safely assume the Council claim is correct.

The first erroneous assumption on this bail-in issue is that it is the only alternative to bail-out.

The obvious alternative is to distinguish the financial institutions that should be bailed out or bailed in from those who should be taken care of at best as any other business.

This is widely known as "Glass-Steagall" legislation that the late XXth century monetarist wave wiped out from the regulatory framework causing the biggest financial crisis ever since, exactly, the 1930's when "Glass-Steagall" legislation was enhanced to prevent those sort of crises.

If a crisis affects the financial institutions for a reason that has nothing to do with the functioning of the financial institutions as such but as the result of the collapse of the main activity of a country, a security issue due to internal or external conflict or natural disaster; summing up if the financial crisis results from a disaster affecting the fabric of a nation, then the support to the financial institutions should be undertaken by central banks mechanisms.

In other words, a generalised crisis in commercial banking activities will normally be in connection with a crisis appearing elsewhere in the economy and should be sorted out this way, that is, in the context of the overall crisis.

But the banking lobby effectively managed to stop any such thing as "Glass-Steagall" legislation to appear in the horizon of both the US and the EU, and therefore managed effectively to move the discussion to this issue of bail-out versus bail-in.

For the pure speculation business, the crux of the matter is to insure their freedom to gain huge windfall sums either as profits or bank manager bonuses when the business goes well and to find someone else to foot the bill when the business goes sower. Taxpayers were the victims in the bail-out schemes, depositors will be the victims in the bail-in schemes. The more speculative the business will be, the biggest likelihood of a succession of big profits and losses will be.

What I found most appalling in these above mentioned European acts is that not even the depositors with less than a 100.000€ will be safe, as their guarantee funds will be used in bail-in schemes.

As we stated in our report this amounts to a real plutocratic coup against basic democratic principles.

We simply think that this state of affairs cannot be tolerated and that voters should give their clear opinion on this in the next European elections.