Gold News

Banking Bail-Ins: Destroy the Depositors

Bail-ins are a very good thing. Burn the shareholders, and destroy the deposit savers...
 
SO the MONEY LENDERS didn't get thrown out of the temple again this Easter Week, writes Adrian Ash at BullionVault...
 
The Queen of England once more touched a few bag of silver coins...handing useless Maundy money to a small selection of her more aged subjects in an old ceremony...
 
And another, less ancient tradition was upheld by the European Parliament too. 
 
Strasbourg's finest voted to confirm the €100,000 level of banking deposit insurance across the 18-nation Euro currency zone. But only that €100,000 limit. Above that, you're on your own.
 
So why the fuss at at cut-and-paste schlock-horror news site ZeroHedge...?
"Bail-Ins Approved by EU Parliament," says a headline. "Deposits Over €100,000 Vulnerable. Coming Next in UK, US and Globally."
Judging by some readers' comments, you'd think this was an evil plot by government to steal bank savers' money. Yet in truth, all bank accounts carry credit risk. Government meddling actually comes with the "deposit insurance" which the EU just confirmed.
 
The name gives it away. A bail-in is different from a bail-out. As the article says, it means that...instead of taxpayer money being used to rescue failed banks like in 2008..."the bank's owners and creditors will be first in line to absorb losses banks will incur, before outside sources of finance may be called upon."
 
Good. Excellent in fact. If a bank fails, burn the shareholders. Then destroy the creditors. It happens in every other field of business. It should happen to banks, too. 
 
For too long, senior bank executives have relied on the promise of taxpayer rescue. So have bank creditors. Meaning you, me and everyone else with cash on deposit. It has made us lazy, and blind to risk.
 
When you put money into the bank, you are lending it. You don't own it anymore. So you are exposed to the bank failing. Or you should be. Yet if you hold up to €100,000 in a Eurozone bank, that money is guaranteed by government. US insurance is $250,000 and in the UK £85,000. Anything above that limit is not guaranteed. This is what the latest votes in Strasbourg confirm, as part of the much scarier "banking union" moves
 
Forget the phrase "bail in". It's a new buzzword, and a silly one at that, to suggest banking failure might hurt people who aren't involved. Boo-hoo. Creditors are very involved. Money in the bank is exposed to the bank.
 
Fact is, you can either have price risk or credit risk. Yes, you can get one on top of the other (such as nominee brokerage accounts, structured investment products). But you can never escape them both. Make your choice, and know your risks. 
 
Physical bullion, owned outright, carries no credit risk. This is why Bullionvault was set up. That's why you don't need or get "depositor insurance" on your gold or silver. Because you are an owner, not a depositor. So yes, you do get price risk alone when you own bullion. But we are not a bank (nor wish to be). So we must use the banking system to receive and return the cash you use to buy.
 
That money is on risk for the bank's solvency. The gold or silver you own isn't exposed to anyone. So if in doubt, buy bullion. Or withdraw excess funds back to your own bank account. Which you will of course have selected after thoroughly studying its risks.
 
Please also be sure to read this Help Page about how Bullionvault cares for unspent client money. Because the risks you take with your money are yours to know and understand. Relying on government to protect you...come what may...is precisely what caused the banking bubble and crash.
 
It is also what will destroy very many savers and investors in the next crash, too. Because governments are now formally, and rightly, telling creditors they are on risk.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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