Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://www.cecaust.com.au
With a new global financial crisis looming, the race is on to finalise a global “bail-in” framework to save the world’s biggest banks.
The head of the Bank for International Settlements’ (BIS) Monetary and Economic Department, Claudio Borio, warned on 3 December of the consequences of the US Federal Reserve increasing interest rates when conditions are reminiscent of the period prior to the 2008 global financial crisis, with “vulnerabilities” and “frothy valuations” abounding within financial markets. High profile UK fund manager, Neil Woodford, on 1 December said there are “so many lights flashing red that I am losing count”. When this bubble bursts, he said, it could be “even bigger and more dangerous” than some of the worst market crashes in history. In the 14 December Daily Telegraph International Business Editor Ambrose Evans-Pritchard warned, “The ‘everything bubble’ is about to burst”. The “everything bubble” refers to the multiple bubbles on the verge of blowing—the housing bubble, the corporate debt bubble, auto and student loan bubbles, consumer debt bubble, the stock market, the bitcoin bubble and the derivatives bubble—compared with the previous crash which hinged solely on the housing bubble. The Fed’s intention to speed up its interest rate increases and reverse the quantitative easing expansion of the money supply means these bubbles “will not survive the US tightening cycle of 2018”.
This is the context in which the post-2008 drive by the BIS and its Financial Stability Board (FSB) to swap government bailouts of Too-Big-To-Fail banks with a global “bail-in” resolution regime, is going into hyperdrive. Such a regime is intended to allow the banks to keep speculating in the global US$1.4 quadrillion derivatives trade—but using their customers as human shields against bankruptcy. The BIS-directed proposal to make “unsecured” creditors—which include depositors—pay to keep collapsing banks solvent has been quietly adopted across the trans-Atlantic economies, under Europe’s Bank Recovery and Resolution Directive (BRRD) and in the USA through the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Asia lagging behind
The Asia-Pacific region, however, has been lagging behind. This includes Australia. In a 21 November statement, ratings agency Moody’s bemoaned: “progress that Asia Pacific (APAC) banking systems have made in implementing bank resolution and bail-in regimes as prescribed under the Financial Stability Board’s (FSB) framework continues to vary significantly and lag behind Europe and North America.”
The statement notes that Japan and New Zealand have broad bail-in powers (which in New Zealand includes all deposits); Hong Kong introduced a bank resolution regime in July 2017; Singapore is to introduce a resolution regime in 2018; and reforms are under way in India. But, it goes on, most APAC jurisdictions “still lack statutory powers to bail in creditors”. It complains that “Basel III contractual securities [so-called ‘hybrid’ or ‘contingent convertible’ (coco) bonds which convert to worthless shares in the bank during a crisis] remain the only type of bail-in-able instruments in most markets”, and represent only some 2 per cent of bank assets in APAC banking systems.
Indians resist
Moody’s cites “public discussions on the design of such regimes … taking place in several markets”. One of these “markets” is India, which is embroiled in a fight over bail-in that parallels the fight in Australia against the government’s bill to give bail-in powers to the bank regulator APRA (Australian Prudential Regulation Authority).
A furore has broken out in India over a government bill tabled in August, the Financial Resolution and Deposit Insurance Bill 2017, which will allow failing banks to be propped up with depositors’ money. The bill has been referred to a Joint Committee of Parliament. If passed, it would establish a Financial Resolution Corporation (FRC) to monitor financial institutions and resolve them if they fail. Opposition party, the Communist Party of India (Marxist), says the new body would have the power “to ensure that a failing bank can be recapitalised with depositors’ money and material without the depositors’ consent”. Other parties, including the Aam Aadmi Party, have likewise condemned the bill. Finance Minister Arun Jaitley, forced to respond to the allegations for the third time in a week, claimed the government would “fully protect” customer deposits in the event of a crisis; however, the “bail-in” clause in the government’s legislation states that banks will be prevented from going bankrupt by the “writing down of the liabilities” through cancellation or conversion—deposits are bank liabilities.
The population is becoming aware of the bill, causing widespread apprehension amongst depositors. A Change.org petition, “Do not use innocent depositors’ money to bail in mismanaged banks #NoBailIn”, has surpassed 132,000 signatures and is growing fast. The petition states: “This bill gives power to a government entity to use depositors’ money to save a bank on the verge of bankruptcy. This government entity can declare the bank doesn’t owe you any money though you have deposited your hard earned money with it.”
In addition, the All India Bank Employees Association (AIBEA) has threatened to strike if the bill is not amended to protect depositors. The AIBEA, which says the FRC will have the power to use depositors’ money to bail in a bank and will supersede the powers of the Reserve Bank of India, has already testified to the parliamentary committee. Current deposit insurance covers 100,000 rupees per customer, which is the equivalent of US$1,550, but the union warns that “This will be closed down and the FRC will decide the amount now.” The United Forum of Bank Unions has written to the Finance Minister demanding the withdrawal of the “draconian” bill.
The parallel push to legislate bail-in in both Australia and India demonstrates the internationally-dictated nature of this law. Because banks were allowed to grow into TBTF multinational casinos, nations are now being forced to sign up to an international safety net for them—a safety net made from the savings of everyday people. This corrupt and unjust policy must be stopped, and replaced with a full Glass-Steagall separation of deposit-taking banks from all forms of financial speculation, which will protect deposits and ensure financial stability.
The Citizens Electoral Council’s fight against the APRA bail-in bill is therefore part of a global fight, and stopping the APRA bill here will help people in India and other countries stop similar laws. The CEC understands that upwards of 800 submissions were made to the Senate Economics Legislation Committee’s inquiry into the APRA bill, which due to the volume won’t be published until early January. This sends a powerful message to the Parliament that lays the foundation for further action to stop the bill in the new year. This is a fight we can win—join us!