New Financial Crisis Laws: Bank Bail-ins, Money Market Freeze

There has been a combined 50% increase in global debt levels since 2007.

The global financial system was not structurally addressed nor fixed in 2008. Problems were papered over with debt.

Increased financial complexity and mushrooming unpayable debts make a new financial crisis a near absolute certainty.

Thus many new financial spillover lock-down laws have been quietly put into place in the USA and around the world (G20 nations) since the 2008 financial crisis.

Here we will cover some rather drastic anti-financial spillover laws which have been put into place for real reasons.

As well major commodity futures exchanges (e.g. COMEX) have also geared up for increased price volatility ahead.

This is not bullion selling hyperbole. These are facts you can choose to ignore, for now.

Here is William White, the former head of research for the central bank of central banks, the Bank for International Settlements (BIS), speaking about the global debt induced destabalization in late summer 2017. 

The financial system is now mathematically more unstable and fragile than what many record nominal prices are conveying to investors.

Interest rates, bonds, recently broken record low volatility, and commodity price suppression have bought a decade's time.

Yet the following new trends and laws are sign posts we must address for wealth preservation ahead.

Bank Bail-in Laws

Since the end of 2014, new G20 Bank Bail-In Laws have been signed and put into supra-national law.

Average bank depositors are now legally treated as unsecured creditors even in the largest economies of the world.

The following is a basic description of the G20 and a definition for Bank Bailins.

G20 - (n) the world’s largest 19 national economies, including the USA, and the European Union together, a group of 20. Additionally there are representatives of the International Monetary Fund (IMF) and the World Bank. The G20 finance ministers and central bank governors began meeting in 1999, at the suggestion of the G7 finance ministers in response to various financial crisis in the 1990s.

Bail-In - (n) to restructure a financial institution that is on the brink of failure by forcing its creditors and depositors to take a loss on their holdings. Regarded as a rescue of last resort to help a troubled financial institution's ability to attract future business. A bail-in is different from a bail-out, which involves the rescue of a financial institution typically by government credit extensions into the failing private sector.

Bailout vs Bail-in ?

To address potential future bank failures, the G20 bank bail-in solution was signed in late 2014. It is still law in as of writing this in early 2018.

While bank bail-ins are relatively newly signed supranational laws. They are purportedly the brainchild of the IMF’s current managing director, Christine LaGarde.

2012 IMF Notes before 2014 G20 Bank Bail-In Laws signed by USA & G20 Nations


What about the FDIC in Bank Bail-ins?

In the United States the Federal Deposit Insurance Corporation ( FDIC ) currently offers a $250,000 USD limit in the USA per depositor, per FDIC-insured bank, per ownership category.

The FDIC is fully aware of new bank bail-in laws yet continues to give both US citizens (and even the world) the misguided assumption that the government will always backstop and insure bank deposit accounts.

Perhaps not so on a real basis, especially following a real bank crisis where global systimatically important banks (GSIBs) of financial institutions are rendered insolvent by bad derivatives bets or otherwise.

Large bank and financial institution names like JP Morgan, Bank of America, Citigroup, Deutsche Bank, HSBC, Wells Fargo, etc. (see page 3) are all perhaps still considered too big to fail.

Many currently argue that if strick GAAP mark to market accounting standards were applied to their current balance sheets, many commercial banks would likely be insolvent today.

If having to write down enough bad bet bets and derivative losses (see image below), these big bank names could vanish.

They are now not too big to be legally ring-fenced, bailed-in, and possibly consolidated into other banks. During such a process, 'average joe' bank account holders would be likely be taking haircuts and delayed in retreiving a percentage of what funds they may have had with the bailed-in bank.

IMF visualization of Derivative Bets amongst large Banks & Financial Insitutions


Bank Bailin Policy is Real and Ongoing (e.g. Cypus, Italy, Portugal

As recently as November 8, 2017, the head of the European Union’s central bank (the ECB) has proposed to completely end bank deposit insurance for any and all bank accounts throughout the EU.

Bank bail-ins have already occurred in Cyprus and Spain, and nearly recently happened in both Italy and Portugal.

Money Market Fund Redemption Gates & Fees

Many basic once long standing financial statues have been quietly adjusted since 2008. Financial lockdown laws and mechanisms to avoid spillover effects are now readied.

Money market mutual funds ( supposedly almost as safe as bank accounts ) can now legally be shut down. These new 2016 laws were put into place by the SEC in order to prevent digital bank runs. 

Mutual fund redemptions can be suspended, with the principal investment now possible to be paid back at less than par (the amount that was originally invested). In other words, during a real market crisis, withdrawing mutual funds may be impossible or at a substantial haircut or loss. Once the crisis subsides you still may simply receive back less than each $1 USD of principal invested into the supposedly safe mutual fund.

The future consequences of all this could be far reaching, perhaps all the way to the base of Exter’s inverted financial pyramid.

Bank Bail-In Defense (e.g. physical cash, bullion)

The famed Exter Pyramid helps show investors that in liquidity crisis and financial spillover events, the assets with the least counterparty risks tend to perform best.

Investors concered about potential bank bail-in policies could frequent their local ATM every few days and withdraw max limits in order to build enough cash they might deem appropriate to get through a few months of financial crisis and potential liquidity freezings.

As well of course, physical bullion in hand and within professional non-bank storage is totally impervious bank bail-ins.

New NYMEX / COMEX Price 'Circuit Breaker' Rules

The price of precious metals (gold, silver, platinum, and palladium) are mostly influenced by short term price speculators who trade futures contracts on western exchanges today.

Political and economic events do have influence on the short term price of precious metals. But it is dubious and naive to believe that what we are seeing today resembles a real free market price for physical precious metals.

Yet when a large enough percentage of the world starts demanding physical delivery of their gold bullion (or other physical precious metals), the current highly-leveraged fractionally-reserved futures contract markets will be forced to adapt to a situation where deliverable physical bullion drives the price for physical gold.

NYMEX / COMEX futures contract ‘price circuit breakers’ have been recently readied in late 2015. These new rules await what is possibly going to be an unorderly future for gold and other precious metal futures contract prices.

Exchanges will monitor the price movements of lead-month primary futures contracts in real-time on a daily basis. The following large price movements in lead-month primary futures contracts will result in triggering events. Triggering events result in monitoring periods, possible temporary trading halts followed by the re-opening of trading, and price fluctuation limit expansions.

Source - page 6

Real physical bullion is never subject to price fluctuation limits, price circuit breakers, or temporary trading haults.

We simply suggest preparing for what these trends portend. Have both an allocation of physical cash and physical bullion holdings outside the financial system.

If these recent financial law enactments and futures market rule changes do indeed get put to real world use you will likely be very glad you did ahead of time.