Banking is a game of confidence, in that if fears of a potential bank collapse arise, then naturally people who hold money at that institution will try to grab their cash, and run. The Global Financial Crisis, where many banks were saved by the use of public funds.
But this means taxpayers are on the hook, and so post the GFC, there were attempts to develop alternatives which would transfer risks from the tax-payers to other parties, including shareholders bond holders and even depositors of an affected bank. The so called bank resolution – or living will – includes the deposit bail-in regimes which were proposed (initially by merchant bankers by the way) and adopted by the G20 to allow deposits held at banks to be grabbed and converted to equity. This happened of course in Greece a few years later.
In the IMF Global Stability Report from October 2023, there was a section which highlighted that the March 2023 bank runs in Switzerland and the United States were unusually large and fast with their speed and size facilitated by rapid online deposit withdrawals and the rapid spread of worries among important groups of depositors via social media and other digital channels.
I am often asked if bail-in is a real risk to savers, and my reply remains the same. It’s a theoretical risk for sure, thanks to the likes of the IMF and others, but practically, its unlikely to be activated because the collateral damage would be enormous. But understand that those bankers who dreamed up bail-in and the QANGO’s who are pushing it, are still pushing Governments to give the financial regulators ever more power, never mind democracy. Its a cautionary tale of who is actually calling the shots, and the risks to democracy are real.
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