Only in the last week, we saw the following developments:
- Slovenian parliament has approved bank bail-in rules. (source)
- The leader of the Eurogroup Working Group (Thomas Wieser) revealed that the eurozone should introduce bank bail-in rules from 2016, as reported by the German Der Spiegel. (source)
- UK based Co-operative Bank announced a bondholder bail-in rescue plan. (source)
One could rightfully ask the question why this type of measures are considered in a world which is being flooded with liquidity on a scale that mankind has never seen before (whether one calls it money printing, quantitative easing, easy money, or helicopter money).
The fact of the matter is that, even with excess liquidity, bank losses are still there, as evidenced in Europe (see Europe prepares to come clean on hidden bank losses by Reuters). Europeans are not not privileged on this matter. Recently, the Bank of International Settlements (say, the mother of all central banks) released a report in which they wrote the following:
Only 30% of the large, international banks analysed is more easily able to fulfil a risk-based Tier 1 capital ratio of 8.5% (including the capital conservation buffer) than a 3% leverage ratio, which is the ratio the Basel Committee favours.
The real issue central banks are facing is the decade low velocity of money. It means that the unprecedented amounts of money being created (i.e. debt being created) are simply not moving.
Bail-ins are not solving any issue on that matter; they only allow ailing banks to keep going.
One could rightfully ask the question why bail-ins are only now coming front stage (and not earlier)? Darryl Schoon explains it by comparing today’s situation with the one in the 1930’s. Fundamentally, the system was the same back then. At that time, there were no bail-ins nor bail-outs; the debt-based banking system simply collapsed. Today, central planners are fighting tooth and nail to avoid a collapse.