A recent research paper by Dr Niko Paltalidis of the UoP (University of Portsmouth Business School) shows in fact that very little has changed in the banks' practices when he points out “Our findings indicate that despite all the efforts to improve the resilience of banking, some banks are as vulnerable today as they were before the last banking crisis, they are just as likely to fail. http://www.port.ac.uk/uopnews/2015/05/12/banks-as-vulnerable-now-as-before-crash/
So what will happen in the next bank crisis?
Have you heard of a Bail-in? Probably not, and you'll find very little in mainstream media on the subject. However the likes of the EU Finance ministers, and international central bank policymakers are in agreement that it is the way to proceed. That's to say the bank's depositors (us) will incur losses. The bondholder bail-out era is winding up, and the depositor bail-in is replacing it. This presents huge risk to savers and deposit holders alike.
So what exactly is a Bail-in, and who is going to implement it?
A bail-in is basically a way of 'making good' or 'restructuring' a bank in crisis. By the recapitalisation of said bank, using the creditors' money (yours), your wealth can be confiscated and turned into bank shares (remember Cyprus 2013?). Our government along with Canada, U.S., Australia, EU and New Zealand have all put in place the statutory powers to do this. You can read the details here: https://www.gov.uk/government/consultations/bail-in-powers-implementation-including-draft-secondary-legislation/bail-in-powers-implementation
This all follows on from the financial crisis in Cyprus, when the IMF led the restructuring of the Cypriot banks back in 2013. Up to this point you could be forgiven for thinking that, as a bank depositor, your money is 100% secure — with a God given right to have your deposits returned. Not so! In law this is not the case. As a bank depositor you are just an unsecured creditor of the bank! So in the blink of an eye, after the Cyprus crisis, the unthinkable happened and the uninsured depositors have become unsecured creditors.
So how likely are bail-in's?
If you believe Western governments have done enough to pay down the debt and that we are on the road to economic recovery, along with having stabilised the banks, then no, not very likely! But if on the other hand you think we are on the road to another banking crisis, then yes, bail-in's are likely! So what are the indicators that all is not well with the banks:
- Propping up the banks with a 0% interest rate lifeline (some free market!) leaving them vulnerable
- Spiralling sovereign debt and printing money out of thin air (For more on this see http://cavendishcoins.co.uk/6/post/2015/03/why-money-debt.html
- Many analysts warn that the banks are now bigger than they were prior to the Lehman collapse
- Back in March of this year credit rating agency Standard & Poor (the agency that down graded the UK from triple A) warned of moving towards 'bail-ins' and away from 'bail-outs'
So what can we do with our money?
Firstly research the bank(s) you are with, and then take action by diversifying your assets. I would always advocate not to put all your eggs in one basket and that a percentage of your assets should be in silver and/or gold, thus providing you with some wealth protection. The importance of hedging is that you are taking a precaution just in case! Like house insurance or a life jacket when sailing, hopefully you will never have to use these things. However, should the worst happen, then you have covered the eventuality and secured your position. And with the current whispers in the UK media of deflation, it's a good idea to hold precious metals. http://www.telegraph.co.uk/finance/economics/11614740/Its-official-Britain-is-in-deflation.html
Precious metals are a great deflation hedge with no third party risk. They are also a great store of value which no government or central bank can interfere with. By buying gold and silver you are not only protecting your personal wealth and purchasing power, but taking back control. Equally important to remember, don't buy precious metals with a view to making a fortune. They are a longterm store of value. The price will go down as well as up, but unlike paper assets they will always be of value. Gold is actually quite stable over the long term, and when times get tricky its value rises because people are looking for a haven. It historically goes up because it is seen as a great store of wealth and as something of real value. Both gold and silver are cheaper now than have been in recent years, but more importantly, cheaper than they will be few a years from here! Below: Historic price of Gold.
We need not act out of fear when looking at the world economic landscape, but this is a call to action. Otherwise, in the wake of all these mechanisms (bail-ins, cashless society / digital money, inflation, VAT etc) we could end up blindly swimming into the cod end of the net! But more on that another time!
I shall leave you with the words of Dr Paltalidis from UoP (University of Portsmouth Business School):
“The European banking system remains highly vulnerable and conducive to financial contagion, which implies that the policies designed to reduce systemic risk are not necessarily doing the job. The findings suggest we might need additional policies to better protect the Eurozone and increase the resilience of the financial system.”
If this has been of any interest or help please share. As always your comments are most welcome!