Apr 4, 2013

Our Government's Plan to Steal Your Bank Deposits

Cyprus bank account owners recently got a shock when they found out that they would probably have 60% of their deposits seized by the government to pay for bad decisions by politicians and bankers alike.  This is the first example of the cost of a nation foolishly supporting its banks, that were designated as "too big to fail" by the government.

Canadian bank account holders are now being set up for the same financial "scalping" as the Cypriots.  Page 145 of the Conservative government's Economic Action Plan for 2013 (Flaherty's so-called "budget") states:
"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. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants."

Mind-numbing, isn't it, until you realize that "bail-in" means a bailout with YOUR money, that a bank's "liabilities" include deposit accounts ... your savings, chequing accounts, term deposits, and GICs, in fact.  Couple this with the government's recent designation that all six banks are now "to big to fail", and you have the perfect storm for potential raping and looting of citizens' bank accounts by the government.

In this case, the government's proposal would involve raiding your accounts, and giving you worthless bank shares (this is the "regulatory capital" part of the plan) in return.  Not a great deal, considering that the bank has already failed, that its shares are now virtually worthless, but the bank must be propped up by all Canadians, as well as depositors, because that bank (or banks) is somehow "too big to fail".

Lousy thinking, and an even lousier solution for bank management incompetence, you would say?   I agree.  Why not think sanely and in favour of Canada's citizens, instead of continually propping up mis-managed and continually-gouging banks?

After all, it's not that they have been subject to hardship!  Twenty years ago we had the concept and infrastructure of a "four pillar" financial system in Canada.  Banks provided banking services, Trusts dealt with trust products, Brokerage Houses provided brokerage services, and Investment Houses "made markets" and M&A activity.  Over the past 20 years, banks have been allowed by the government to gobble up trusts, brokerages and investment houses ... as well as to offer insurance products.  All to increase bank profits, reward shareholders, preferred shareholders, and bond holders.

But that's not all!  They regularly keep only 7% (proposed to be raised to 8%) of your deposit accounts in semi-liquid form.  This is (almost) their "leverage" or "liquidity ratio".  The rest is at work earning money for the bank.  If a bank only incurs a loss of 7%  - 8% (think credit card, line of credit, mortgage, business loan meltdowns, and abnormal queues of depositors wanting their money back, in this era of global financial downturn), it will be bankrupt!  Their leverage is around 12-13 times semi-liquid money retained to service daily cash needs.  Don't feel bad ... many European and U.S. banks have much higher leverage ratios, and there's even one bank in Luxembourg (a so-called safe and prudent banking haven, as described by complicit EU financial officials) that has a leverage ratio approaching 100 times!

But for Canadian banks, that leverage ratio is even after being helped by the Canadian taxpayer assuming responsibility for paying account holders the first $100,000 in their deposit account via the CDIC (Canada Deposit Insurance Corp) "insurance" if a bank fails, AND for assuming all the risk of bank-held mortgages "insured" by CHMC (Canada Mortgage and Housing Corporation), AND for buying $55-60 Billion of CHMC mortgages from the banks, starting in 2008, to provide them "temporary" liquidity during the great financial crisis of 2008 - 2009.  Needless to say, both CDIC and CHMC are virtually shell corporations of the federal government, with practically no assets to pay this "insurance".  Which means that all Canadians are on the hook for these accounts, taxpayers especially so.  You are welcome, banks, for these avoided costs and risks, thus increasing your profits.

Rather than coddling the banks and sucking up to them, why not make them "too small to fail"?  Re-establish the "Four Pillars" infrastructure again by legislating banks out of Trust, Brokerage, Investment and Insurance activities over, say, the next couple of years.  If Canadians will be raped, looted and pillaged to support a policy of "too big to fail" for our banks, maybe it's the policy that's wrong.  Continually coddling the banks clearly isn't working, and it's time they paid their own way.

So let's change the policy and decrease the amount of deposits (reduce leverage ratios) that can be earning the banks money.  And while we are at it, let's legislate clearly that if a bank gets into trouble it's the shareholders who will be wiped out completely first, then the bondholders, then the preferred holders, etc.  The depositors should be the last money that is touched to make a bank "whole" again.  Even better, let's legislate that it's better that a bank fail, than to legalize theft from depositors to support shoddy and greedy management practices at banks.

And how about stopping the "temporary" liquidity gift we made in 2008 and making them pay it back.  Obviously they would have done so long ago had it been to their benefit so, logically, it must be costing Canadians ... so that banks profits are higher.  And let's do some thinking about getting Canadians out of the risk of "insuring" mortgages and the first $100,000 of deposits.  Risk is what a bank assumes when it gives you a mortage and charges you a rate for that loan.  Why is the taxpayer on the hook at all?  Especially when Canadian bank CEOs seem to enjoy vastly higher salaries these days that even their obscenely-rewarded U.S. counterparts.

After all, it's not as if our Canadian banks have a profit problem, do they?

And if the Conservative government won't start looking after Canadians, rather than following instructions from Canadian banks and U.S. corporations, well, we can deal with that at the next election, can't we?

Write or e-mail your MP, or pollical party with a link to this article.  Because that's the only way the voice and wishes of Canadians will result in positive action for us, the people!