Why We Are All Now Cypriots-to-bein the New Age of Bail-Ins
According to the mostly ignored and hardly covered piece of newsfrom a couple of weeks ago, it turns out that 11 of the 28 European Union countries have been scolded by the European Commission for failing to implement a new set of rules intended to prop up failed banks. Known as the Bank Recovery and Resolution Directive (BRRD), the stated purpose of the newly required rules is to purportedly protect taxpayers from having to cover the losses of any possible future bank failures, similar to the failures that occurred back in 2008. Taking the place of the more conventional taxpayer-funded “bail-outs,” banks would see their losses recapitalized with the newly-minted practice of the “bail-in.”
A bail-in, in case you aren’t familiar with it, is the emerging alternative to the well-known bail-out. Back in 2008 when a slew of “too big to fail” (TBTF) banks crumbled due to $147 barrels of oil and the bursting of the housing bubble, the entire financial system was put at risk and was deemed to be in need of a rescue. What occurred was an influx of money from outside sources to cover the bank losses, one example being the $700 billion life-line from the US government (which essentially means from the US taxpayer). This is known as a bail-out.
This differs from what occurred with the Cypriot banking system back in 2013, of which has since come to be known as a bail-in. In short, due to Cyprus’ insolvent banking system, all banks in the country were shut down under the “bank holiday” rubric, to go along with withdrawals being limited, if not completely cut off. Upon cessation of the bank holiday measures, it was announced by officials that all bank accounts in excess of €100,000 would have their balances reduced by 47.5% (also known as a “haircut”). As the practice now goes, confiscated bail-in funds are used to recapitalize failed banks, and the depositors who had their balances reduced essentially become owners of a bank that no one has much of an interest in owning.
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