Deposit bail-in risks are slowly being realised in Ireland, after it
emerged overnight that FBD, one of Ireland’s largest insurance companies,
have been moving cash out of Irish bank deposits and into bonds.
Revelations regarding deposit bail-in risks came in the wake of warnings
of a new property crash centred on the housing market in Ireland.
The former deputy governor of the Central Bank warned in an op-ed in a
leading international financial publication, Project Syndicate, that
Ireland is at risk of another housing market crash.
Bail-In
Regimes – Key Considerations (GoldCore Research)
Insurer FBD has moved over €150 million out of the Irish banking system
and into corporate and sovereign bonds over the past year. The move was
prompted by low returns offered by bank deposits and the risks that deposit
bail-in rules could see deposits confiscated.
FBD chief executive Fiona Muldoon told the Irish
Independent that the “extremely low returns offered on term deposits
by banks, coupled with fears that new bail-in rules introduced this year by
the European Union could expose bank bondholders and depositors to bailing
out a failed lender, meant it has shifted investments away from banks.”
The new deposit bail-in mechanism is designed to protect banks and is
touted as a way to prevent taxpayers being liable for bailing out collapsed
lenders. It is believed that it leaves bank bondholders and deposit customers
with more than €100,000 on deposit at risk of footing the bill.
There is a belief that bail-ins only relate to “the wealthy” and “rich”
depositors as they will be imposed on those with deposits greater than
national deposit guarantees. These deposit “guarantees” are generally the
‘big round’, arbitrary number of say €100,000, $250,000 and £75,000. These
are not particularly large amounts and could amount to the entire life
savings of a pensioner, a family or indeed it could be the entire capital of
a small to medium size business enterprise.
An example of this is the UK where the deposit guarantee was arbitrarily,
suddenly and with little fanfare quietly reduced from £100,000 to £75,000
just last year in July 2015.
Thus, it is important to note that the arbitrary round number in the
various government deposit guarantees can be, and probably will be, reduced
to a lower number – say the new round number of €50,000, £50,000 and $50,000
– depending on the severity of the next banking crash.
In the event of bail-ins, governments and banks are likely to seek to
impose deeper haircuts on creditors including depositors in order to bail-out
and protect the failing banking system.
Download
Bail-in Guide
FBD’s deposits with Irish banks were reduced from €451 million to €305
million in recent months. FBD made a €3.1m loss in the first half of the
year.
As reported by the Irish Independent:
“As they mature, and as the bank bail-in rules come into play, it’s no
longer the case that for corporate investors depositing at a bank is risk
free,” she added.
“To be honest, the return is abysmal now. We’ve gone back to a more
typical investment portfolio for an insurance company.”
“You have to be paid for the risk you take,” she added. “You might
entertain the bail-in risk if you were being properly paid. But if you’ve a
bank trying to charge you for leaving your money with them, you’re not
inclined to take any risk at all.”
The recent bank stress
tests showed that Irish banks are the most vulnerable in the EU in the
event of another financial crisis.
Meanwhile, the risk of another property crash centred on the housing
market has been warned of by a respected economist. Stefan Gerlach, who
left the Central Bank of Ireland earlier this year to become Chief Economist
at BSI Bank in Zurich, asked:
“Having endured the collapse of its housing market less than a decade
ago, Ireland has lately been experiencing a blistering recovery in prices,
which already have risen in Dublin by some 50% from the trough in 2010, is
Ireland setting itself up for another devastating crash?”
Among the concerns he expresses in an article titled ‘The
Return of Ireland’s Housing Bubble’ for the global finance think-tank
Project Syndicate is that the Central Bank here is coming under undue
pressure from the construction industry and politicians to relax the loan to
value and loan to income ratios on mortgage lending it introduced last year.
He warns that while housing bubbles are easy to spot, there are a number
of conflicts of interest that make it hard to take action as the market gets
out of control as reported by Newstalk:
“The obvious question is why nobody stepped in before it was too late.
The answer is simple: while the bubbles are inflating, many people benefit.
With the construction sector thriving, unemployment falling, and banks
lending freely, people are happy – and politicians like it that way.”
“Many in Ireland might find that conclusion overly pessimistic. Maybe
they are simply hoping that, this time, the luck of the Irish will hold.
Perhaps it will, and this time really is different. But there isn’t much
evidence of that,” he concludes.
The ‘Bail-in regime’ is one of the greatest financial risks to investors,
savers and indeed companies internationally today. Yet it remains the
most poorly covered financial risk and is largely ignored by financial
advisers, brokers and not surprisingly governments and banks.
The growing financial risk in all western countries has not been properly
analysed. In a world already beset with huge deflationary pressures and still
insolvent banks, the bail-in regime and confiscating deposits, especially
from job creating companies, would be extremely deflationary and would likely
contribute to severe recessions.
This is something we warned of when we first conducted our extensive
research on the developing global bail-in regimes after the Cyprus bail-ins
in 2013. Diversification of deposits remains vital and one important way to
protect against a bail-in is owning physical gold. Taking delivery of gold
coins and bars and owning bullion in allocated and segregated storage in the
safest vaults in the world is a prudent way to protect against the deposit
bail-in regime.
Gold and Silver Bullion – News and Commentary
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Latest
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Bail-in
deposit fears spur insurance company move to bonds (Independent)
Ireland
warned of new property crash (Independent)
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