Michael Moore 18 November 2020

What is Bail-in?

Put simply, Bail-in is where a bank can grab your money which you have in that bank.

To understand how this works we really need to see how banking works.

When you put your money into the bank, the bank then ‘owns’ your money but has a debt to you for those funds. In effect the bank has borrowed your money and uses it as they see fit.

Just as you can borrow from the bank, the bank can borrow from you but it is at your discretion. The bank does not come to you and ask to borrow the money. You simply offer to lend the funds to the bank when you open an account and use the bank as a deposit machine to retain your funds. In fact you lend the funds in favour of the bank although they do not point this out to you.

The bank becomes in effect your creditor. They are indebted to you. A debt may be owed by sovereign state or country, local government, company, or an individual or a bank. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages, all types of debt.

Bail-out is usually understood as being a situation where governments are forced to recue private institutions from financial failure. But there is a new term called a bail-in. A bail-in occurs when say a government rescues a borrower and gives then the funds to pay their debt usually from someone else.

According to The Economist, the magazine that coined the term "bail-in", a bail-in occurs when the borrower's creditors are forced to bear some of the burden by having a portion of their debt written off. For example, bondholders in Cyprus banks and depositors with more than 100,000 euros in their accounts were forced to write-off a portion of their holdings. This approach eliminates some of the risk for taxpayers by forcing other creditors to share in the pain and suffering.

This is like when you are in school and one child does something naughty and stupid but the entire class is kept back as a punishment, even though they are not guilty.
The only problem with bail-in is that it invariably uses someone else’s money, such as yours for example.

Bail-outs are designed to keep creditors happy and interest rates low, while bail-ins are considered ideal in situations where bail-outs are politically difficult or impossible, and creditors aren't keen on the idea of a liquidation event.

A bail-in provides relief to a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. A bail-in is the opposite of a bailout, which involves the rescue of a financial institution by external parties, typically governments, using taxpayers’ money for funding.

Bailouts help to prevent creditors from taking on losses while bail-ins mandate creditors to take losses.

According to ainsliebullion, “Few would know that very quietly on 14 February 2018, with just 7 senators present, the Financial Sector Legislation Amendment (Crisis Resolution Powers And Other Measures) Bill 2017 was passed into law on a voice vote. You likely saw no press on the matter and yet the ramifications for all Australians are potentially huge.

This is a very long and complicated piece of legislation but at its very core it brings Australia into line with the ‘Bail In’ agenda of the Bank of International Settlements (BIS) as agreed at the G20 here in Brisbane in 2014. ‘Bail In’ is about government not bailing out distressed institutions as we saw in the GFC using tax payer’s money, rather using the creditors of the bank to bail itself out.

The legislation allows our banking regulator APRA ‘crisis powers’ to secretly step in and run distressed banks. It allows APRA to then confiscate and write off certain types of bonds and hybrid securities and allows them to confiscate cash savings of SMSF’s. Whereas elsewhere around the world, including our neighbours New Zealand, they specifically include the confiscation of depositors’ funds (savings), the Aussie version just cleverly doesn’t specifically exclude that….

And the Australian Citizens Party noted, ‘The Turnbull-Morrison government rushed this legislation through Parliament on 14 February 2018, with just eight senators present in the Senate chamber and without a recorded vote. The chair of the Senate Economics Legislation Committee which conducted an inquiry into the legislation, Senator Jane Hume, insisted to constituents that it was not a “bail-in law”; Treasury and other agencies stated it was not the “intention” of the conversion and write-off provisions of the law to bail in deposits. However, the government rushed the legislation through the Senate knowing that Pauline Hanson’s One Nation senators intended to move an amendment that explicitly excluded deposits from the law, but were not in the chamber; and another government senator, Amanda Stoker, has since admitted it is a bail-in law. Robert Butler has analysed both the legislation, as well as new information revealed by banking analyst Martin North and economist John Adams, that banks can arbitrarily change the terms and conditions of their deposit accounts.’

So, take note you have been warned. Your deposits can be used in a bail-in scenario which, with the COVID-19 sanctions in place causing massive debt in institutions and small businesses may be not far away. This coupled with the current four main Australian Banks pushing for a cashless society means your control over your funds is decreasing rapidly. Investing a portion of your assets in gold, precious metals and indeed even crypto currency such as bot coin would ensure that your assets remain safe and NOT subject to bail-in.

When this happens to you, it gives new meaning to the term, ‘tough titties.’


50 views0 comments