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If there's one thing that concerns everyone it's a threat to their capital.
So you'll be interested to know that the risk of a new type of strategy to capitalize faltering banks keeps growing every day.
It's a strategy that's been tried before, with just enough "success" to be dangerous, and it puts your hard-earned capital at risk.
I've promised to keep you abreast on the evolution of this insidious way for governments to offload risk. Also I wanted to update you on how to protect yourself against these measures impacting your portfolio.
Today I have news on both fronts that's both unsettling and enlightening.
But let's start right now at the beginning, and look at how your capital may be at risk, and what's so alarming…
Their "Solution" Impacts You – Badly
Since not everyone is familiar with the term "bail-in," let's take a look at what it means.
A bank bail-in is when an ailing bank's creditors are tapped to help repair its balance sheet. This "help" can take many different forms, but in general is associated with having creditors restructure or write down their debt obligations.
This normally includes shareholders and bondholders.
Don't confuse bail-in with a bail-out. The latter is when the government uses taxpayer money to help save an ailing bank.
But since the Cypriot financial crisis of early 2013, depositors have been added to the list of creditors, and this is the crux of my deep concerns. You see, this has been tried before, and the results were pretty scary…
The first suggestion to save ailing Cypriot banks was a one-off levy on deposits of 6.7% up to €100,000 and 9.9% for higher deposits, on all domestic bank accounts.
But there was massive pushback, and the deal failed to gain approval from the Cypriot parliament.
The final "solution" was an over 45% haircut for deposit amounts over and above the €100,000 insured minimum at the affected banks. Thanks to some sly moves, this deal didn't even require parliament's approval.
Bail-ins are a major threat because central planners are doing everything within their powers to leave savers with no alternatives.
Right now, finance officials are working hard towards an agreement that will make the bailing-in of creditors the new norm in dealing with "too big to fail" (TBTF) financial institutions.
That's the purview of the Financial Stability Board (FSB), an international body set up in the wake of the 2008-2009 financial crisis, to develop and recommend changes to deal more effectively with TBTF financial institutions.
Back in September 2013 the FSB published the report, "Progress and Next Steps Toward Ending 'Too-Big-To-Fail,'" for presentation to the G-20.
In it, the FSB confirms that "Substantial headway is being made in the implementation of the Key Attributes across FSB jurisdictions, as demonstrated in the United States by the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act…" It also highlights progress in other FSB jurisdictions like Australia, France, Germany, Japan, Netherlands, Spain, Switzerland, and the UK.
More importantly, the FSB confirms that the G-20 endorsed the "Key Attributes of Effective Resolution Regimes for Financial Institutions." These "Key Attributes" are meant to facilitate resolving TBTF problems, by "…using mechanisms for losses to be absorbed …by shareholders and unsecured and uninsured creditors." (Emphasis mine.)
In a post-Cyprus world, you can certainly include bank depositors as unsecured creditors, at least for amounts above deposit-insured limits.
But desperate times can lead to desperate measures. Remember, the initial proposal in Cyprus would have confiscated funds from each and every account in the nation, including the insured portion.
So consider yourselves forewarned. Here's why…
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.