In case you missed the announcement, Cyprus-style bail-ins are coming to a bank near you.
On November 16, leaders of the G20 Group of Nations – the 20 largest economies – made an important decision. The world’s megabanks now have official permission to pledge depositor accounts as collateral to make leveraged derivative bets. And if they lose a bet, the counterparty to the contract has first dibs on your money.
The governments of these 20 countries are now supposed to put these arrangements into law. Most, including the US, have already done so.
You could be forgiven for not paying much attention to the G20 meeting, because it was mostly “more of the same” – the latest plan to have central banks inject trillions more dollars into the global economy.
But the G20 also endorsed a proposal with a mind-numbingly tedious title: Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution. Not exactly a page-turner. Your average American is more likely to watch Chicago Fire than to delve into the minutiae of the global financial system.
But this proposal profoundly changes the rules for banking globally, and not in a good way. Deposits in banks that are “too big to fail” will be “promptly recapitalized” with their “unsecured debt.” This avoids those nasty taxpayer-funded bailouts that proved so politically unpopular during the 2008-2009 financial crisis.
And the largest chunk of unsecured debt is your bank deposits. Insolvent banks will recapitalize themselves by converting your deposits – checking accounts, but also money market accounts and CDs – into stock.
Thus, when you deposit money in a bank, you’re taking the same risk as someone buying a stock. Or, for that matter, betting on a horse named “Falling Star” at the local racetrack. Because, in effect, that’s what banks are doing with your money.
The G20 has also officially declared that derivatives – the toxic contracts Warren Buffett calls “financial weapons of mass destruction” – are secured debts. Since your bank deposits are now only unsecured debt that the bank has pledged to a secured creditor, guess who gets your money if the bet goes the wrong way for the bank? Answer: It’s not you.
Heads, the bank wins. Tails, you lose.by