After the Cyprus Bank Heist where the government took as much as 40 percent of large-balance bank accounts above 100,000 euros, three other EU member states have vowed to use the same method for confiscating bank deposits from private citizens. The finance ministers of EU’s member states stand firmly behind this confiscation scheme, which means that it could easily become common practice in Europe to steal people’s bank deposits to save troubled banks – or, as some politicians have said, for “similar” crises.
The big, unanswered question is of course what those similar crises would be. A common argument among Europe’s leading politicians is that regular taxation no longer works: they have effectively maxed out their ability to take people’s incomes, to charge a value added tax on their spending and to seize some of their equity through property taxes. Therefore they simply have to come up with new ways to get their hands on people’s money.
An even more urgent question, though, is why this reckless form of confiscation is now spreading beyond Europe. The Dollar Vigilante reports:
Rest easy, Canadians, for your bank accounts are going to be made as safe as those bank accounts in Cyprus. Just take a look at the Canadian government’s budget plan for 2013, particularly pages 144 and 145 of Economic Action Plan 2013. There the Canadian government promises to use Canadian deposits to save “systematicaly important” banks…
Why – why – would the Canadian government want to do this? Were we not told during the opening of the Great Recession that the Canadian banks were solid and shielded from the ramifications of the U.S. mortgage crisis? Why would the federal government in Canada all of a sudden feel it necessary to give itself the right to confiscate people’s deposits?
Let’s see what they actually say in their 2013 budget plan:
The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada.
What does this mean in plain English? Well,
1. Should this budget plan pass into law, the federal Canadian government will give “systemically important” banks the authority to take bank customers’ money and turn them into the bank’s own money. This is what is meant by “conversion of liabilities into regulatory capital”. It is the exact same thing as if you owe the bank $10,000 on a car loan and you could somehow make the bank owe you that money instead.
2. Some banks are deemed “systemically important” without a clear definition of the term. This means that the government has pre-selected a group of banks that will be given the government’s go-ahead to seize customers’ money – uh, I mean… convert liabilities into assets. Since there is no workable definition of “systemically important” and since it is only this loosely identified group of banks that will be allowed to do this, it is very difficult for bank customers to know where to go with their money. If (when) this new deposit confiscation scheme comes to the United States, the equivalent of a systemically un-important bank would be your local credit union.
3. Again – and I cannot stress this enough – it is remarkable that the Canadian government feels the need to include this scheme in its latest budget plan. Sure, the Canadian economy is slowing down, with a growth outlook that is more pessimistic than for the U.S. economy, but are Canadian banks really in such a bad shape that a recession would hurl them into insolvency?
As for the last point, The Dollar Vigilante adds a confounding observation:
Also, due to recent legislative reform, Canadian securities held by those with domicile in Canada can no longer be traded in accounts held in other parts of the world. Non-Canadian banks have been sending letters to their Canadian customers to inform them that they must sell or transfer any Canadian securities held in their accounts by an April 5 deadline. Canadians can’t even transact with an offshore broker who isn’t registered in their specific PROVINCE.
Effectively, this means that Canadians have to take their money home and put it in a Canadian bank. Preferably a “systemically important” one, we assume. But why would the Canadian government force its citizens to do this?
There are of course regular tax reasons: with more banking going on at home there are more transactions to be taxes. Canada, unlike the United States, has a territorial tax system which means that the federal government can only tax economic activity within its geographic jurisdiction. By de facto forcing people to bring offshore assets home they effectively eliminate the shortcomings of a territorial tax system.
Nevertheless, one cannot help but wonder if there is more than meets the eye when a government first forces people to bring offshore banking home and then allows large banks to grab customers’ money in the event of a crisis.
Let me add a few words on the confiscation idea itself. Ever since modern banking was invented in northern Italy in the late Middle Ages, the contract between the bank and the customer has been a sacred one. Few institutions have safeguarded private property rights with such vigilance as banks. No doubt, there have been bank collapses and failures throughout history, and people have lost their bank deposits. But that has been because the bank speculated – took risks – with its customers’ money.
Basically, it was not until the 20th century that governments started regulating banking on a large scale. And slowly but inevitably, with regulations came bail-outs, where governments vowed to use other people’s – taxpayers’ – money to save banks that over-indulged in risk taking.
After governments removed the annihilation risks for banks in general, and for “systemically important” banks in particular, by means of tax-funded bail-outs, the banks no longer had to worry as much about their risk exposure. Add to this the fact that over the past 10-15 years banks have bought loads of treasury bonds issued by welfare states all over Europe. Together with the bail-out pledge from governments, the massive investments in treasury bonds presented banks with an iron-clad investment strategy. They could easily maintain or even increase their investments at the high-risk end of their portfolios.
Now that governments have effectively eliminated common-sense, market-based banking and also maxed out what they can take from taxpayers, then rather than getting out of the banking industry, our politicians are willing to destroy one of the world’s oldest property-rights institutions.
To be succinct – this is not good. And there is a lot more to be said about it. Stay tuned.