I did some quick googling, and found a document on the new york fed’s website (Warning PDF)
I am not a banking expert… is this a way for the banks to once again invest in risky projects, and use depositors funds (instead of taxpayer’s money) to pay their bills?
According to what I am reading, the bank can and will convert deposits on their books from liabilities to assets by wiping the books of a depositors account.
Is this the next step in global financial collapse, or am I reading too much into this?
also you have misunderstood the subject, it is about a forcing tool that the government, the financial regulators may impose in the resolution of a bank failure, not a tool of the bank itself.
Thank you for the info, including the bloomberg link.
Perhaps you can explain this further. I understand (at least I think I do) that the investors that will get impacted first are the bank bond holders, not the average person with a bank account (checking/saving/money market/etc).
However, when I read the fed pdf, they describe checking accounts as being liabilities on a bank’s balance sheet. They seem to be referring to the average person’s bank funds.
Just about anyone with an income has a bank account. These accounts are liabilities to each bank’s balance sheet, yes? Therefore, they can take any depositor’s account total and wipe it out. You may believe this would never happen, but the fact they actually wrote it down and it is a regulation option sitting there in the dark waiting to be pulled out if/when needed, makes me think they have the ability to do this.
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However, when I read the fed pdf, they describe checking accounts as being liabilities on a bank’s balance sheet. They seem to be referring to the average person’s bank funds.
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yes the deposits are an accounting liability to a bank. This is the basic accounting. But it the accounting is not the same as the bank regulation categorizations.
That is a question for reading the specific legal details of the European regulation legal parameters. I have not bothered to do this but I do not think it is the case that the depositor liabilities are the subject of this regulation (it is the bond holders), but the specific focus can be understood by readding what the regulation is saying.
or you could read the actual regulation instead of strangely speculating…
Yes, as reading a US government generic economic research note document that has the principal focus on the US laws and regulations is a very weird and nonsensical way to understand what a European Union regulation can mean and can do.
in a failed bank situation unless there is for the national level a national deposit insurance, the depositors already lose their money. This is what the Bank Failures are or were until countries began to invent the Deposit insurance.
You are correct that I am mixing the two here, and I agree that what had happened in Austria is not an apples to apples comparison. I started reading about the Austrian bank issue, and the article I linked to was not as clear as the Bloomberg article.
However, when I did try to find out more about this (what a bail-in was, how it was implemented, how it impacted investors, etc), that is when I came across the newyorkfed link. So that is what I read. I don’t pretend to understand all of it, but the US regulations seem to indicate this bail in (removing a normal person’s checking/savings account) would do exactly what I have been discussing…
When I get my check direct deposited into my bank account, that creates a liability for the bank’s ledger. I understand this. I also understand that in the normal course of business, I will not be getting all of my money out each payday by physically going to the bank and retrieving my money in cash. As my bank is currently paying zero percent interest on my checking, the ONLY benefit of putting my money into the bank this way is for convenience. I don’t have to carry around physical cash, nor do I have to find a safe place to stash it. However, if a US bank decides that a bail-in is in order (and I would guess they cannot do this without regulators agreeing, but let’s say the regulators DO), would not what I have described be exactly what would happen?
Now the FDIC is supposed to insure each account for $250k. Even if that is the case, if someone has more of that in one of their accounts, would that money be gone without any chance for recovery?
As an example, let’s say someone has $300k in their bank account. The bank is permitted to do a bail-in. This person would lose $50k because they have no insurance beyond this, correct?
I am not trying to be dense here. I am trying to understand if
this bail-in could be used in the US if deemed necessary by the regulators and bank, and
would anyone with assets over $250k in that bank automatically lose those assets without any recourse to recover those funds?
I didn’t mean to intertwine the situation in Austria with the US. I was surprised that the bail-in was something the US banks (and found on the feds own website) discuss and seem to indicate that this is a potential avenue that could ultimately be taken.
Thanks for your patience.
I am not an american. However that article is an overview of the economic and potential actions for resolution of the mega banks, and not telling you the standard application of the US regulations. You are reading as it is presenting a standard, the author is clearly trying to discuss the “unexplored” territory of the large complex international banks. I have not read this closely but your fears appear to me to come from a complete misreading of the purpose of this article.
the emphasis added
THE DECISION IS NOT AT ALL A BANKS. You are still completely misunderstanding this concept. This concept is 100% purely that of the government, the financial regulators.
No bank management would ever opt for this (which is a regulator action, so again not their choice in any way) as it destroys them.
In a country with deposit insurance it can only be imagined to happen the case of such a mega-crisis that the FDIC has itself become insolvent and that means something like a total system collapse.
This is a question of American law and the specific regulation. But as this decision would be one of the FDIC as a joint regulator of the insured bank, the answer is you are posing a question from a mistaken idea this is some kind of independent process.
No.
One there is no “permitting” of the bank - this is a regulator action.
Two, it is already the case in the bank failure -not one thing to do with “bail in” - that the amount of deposits over the insured amount is gone, unless the regulator / insurer can cover more or there is a government political decision to cover more.
Read the actual US regulation I would say, not a speculative paper.
??? this is already the case in a bank failure and has not one thing to do with bail-in. if you do not have insurance over the insured amount and the bank has failed, this money is gone. Conversion to the equity might actually save such a depositor some value.
You seem to naively think that depositors had some magical ways to get money back from a bank in the case of a bank failure. There is not, the classic bank failure occurs when in fact they can not repay depositors. In this case you have nothing (or just cents for the dollar) sans the Deposit insurance. This is why the concept was created and implemented in all major banking systems.
So again
Not Banks, your regulators
Not actually decided or yet law, but being thought through for the cases of the resolution of the failure (bankruptcy) of the large complex bank.
you have 100% misunderstood the concept.
but if you are worried, just keep your money in a small bank.
FTR, I do understand the concept of the FDIC, and why it was put in place. I have no illusions about all of our money sitting in a big bank vault. ANY bank in the US (and probably globally) has very little currency on hand WRT actual deposits (most likely less than 10% of deposits, probably less.) An actual run on any bank would empty the physical cash within hours.