The European Union and the G20’s Financial Stability board have imposed a “bail-in” regimen to aid in banking crisis. This bail-in system means keeping insolvent banks afloat by “confiscating the savings of investors and depositors.” Instead of taxpayers paying for the debt of the banks, as in the case of so-called “bail-outs,” money from public and private accounts would be used to pay that debt. In November 2015, because of this new “bail-in” rule, roughly 130,000 shareholders and junior bondholders suffered losses in Italy.
U.S. citizens should keep our eyes peeled for the use of bail-ins for our “too big to fail” banks. The Dodd-Frank Act signed in 2010 gives power to these banks to perform bail-ins. The $10 trillion from derivatives that US banks can keep on their books could fall on the shoulders of depositors and creditors. With mandates such as “Adequacy of Loss absorbing Capacity,” as approved by the G20s Financial Stability Board, any deposits made to a bank become equity shares and that money can find its way to the bank’s pockets.
There are a number of solutions to reform commercial banking and keep it honest—including amending Dodd-Frank to block “bail-ins,” and reinstating the Glass-Steagall Act. Glass-Steagall, established a firewall between risky investments and bank deposits, but was effectively repealed by Congress and President Bill Clinton in 1999.
Fair banking solutions also include the option of public banking. Public banking allows a community to keep its own generated wealth, instead of having it siphoned off by banking shareholders and executives.
Many treat banking reform as a mountain to be crossed—when we get there. Others suggest we can’t wait: We need to reform the banking system before a major crisis impacts us all.
Source: Ellen Brown, “A Crisis Worse than Islamic State? Bank ‘Bail-ins’ Begin,” Truthdig, December 29, 2015, http://www.truthdig.com/report/item/a_crisis_worse_than_isis_bail-ins_begin_20151229
Student Researcher: Amber Loredo (San Francisco Sate University)
Faculty Evaluator: Kenn Burrows (San Francisco Sate University)