US Fed official speaks out: ‘bail-in’ destroys financial stability
Posted on April 18th, 2016

Citizens Electoral Council of Australia Media Release Monday, 18 April 2016

The architects of bail-in” at the Bank for International Settlements (BIS), Bank of England and APRA have been exposed as liars by outspoken Minneapolis Federal Reserve President Neel Kashkari, an advocate of breaking up too-big-to-fail (TBTF) banks.

Bank of England Governor Mark Carney and his cronies at the BIS claim that the bail-in policy of propping up TBTF banks by stealing the savings of their unsecured creditors—depositors and investors—is necessary for financial stability”. Indeed, the BIS-based agency directing the implementation of bail-in worldwide, which Carney chairs, is called the Financial Stability Board.

Last week’s dramatic bail-in of failing Austrian bank HETA, under the EU’s Bank Recovery and Resolution Directive (BRRD), wiped out 100 per cent of subordinated debt (hybrid and mortgage backed securities etc.) and 53.9 per cent of uninsured deposits and senior bonds. In a 10 April statement the Austrian Financial Market Authority insisted that the bail-in measures fully satisfy the aims of the European resolution regime—namely to guarantee financial market stability, to protect taxpayers and to bail-in creditors.” (Emphasis added.)

Bail-in is now in force across the most of the Western world, including in the EU and UK (BRRD), in the USA under the Dodd-Frank Act, and in New Zealand. In Australia, a CEC-led mobilisation in 2013-14 stopped plans to legislate bail-in, but bank regulator APRA (Australian Prudential Regulation Authority) under chairman Wayne Byres, former Secretary General of the BIS’s infamous Basel Committee”, has simply asserted it has bail-in powers.

In a combative 5 April interview with US business channel CNBC, Neel Kashkari rubbished all of the claims made about bail-in by the likes of Carney and his cronies. The CNBC interviewers first demanded to know why Kashkari is rocking the boat now, when regulators are supposedly reaching a solution to the TBTF problem after eight years, through bail-in and Dodd-Frank. Well, if I’m not going to speak up, who’s going to do it?” Kashkari demanded.

CNBC then asked, So you don’t think that Dodd-Frank has gone far enough? That the capital requirements that are in place now and some of the other regulations that, by the way, people like [JPMorgan Chase boss] Jamie Dimon, you know, they’ve often called Dodd-Frank, Dodd-Frankenstein. They are fed up with the regulations that they already have to deal with. You don’t think it’s gone far enough?”

For the biggest banks, no I don’t,” an emphatic Kashkari returned. While conceding to some positive measures in Dodd-Frank, he insisted it did not solve the TBTF problem:

But the question is in a stressed economic environment like a crisis, when multiple banks are running into trouble at the same time, will we actually be able to hair cut [i.e. bail in] bond holders and creditors? I say the answer is no.

And the reason,” Kashkari continued, is the contagion from one bank to another bank to another bank. No one yet has figured out how to solve that contagion risk.”

He then listed all of the various bail-in measures as abject failures, including Dodd-Frank, the FSB’s Total Loss Absorbing Capacity (TLAC) requirement (involving various aspects of bail-in, including bail-in bonds, all of which turn bank customers into the equivalent of air bags in a crash), and the European market for bail-in bonds called contingent convertible” or CoCo bonds:

Dodd-Frank hasn’t done it,” Kashkari declared. The TLAC hasn’t done it. We see it in Europe with the contingent conversion debt. Those contingent conversion securities haven’t added to stability. They’ve actually added to instability and uncertainty. We need to be honest about that.”

Kashkari first made headlines in February when he called for breaking up the TBTF Wall Street banks—an echo of the increasingly urgent calls for a Glass-Steagall separation of commercial banks with deposits from risky investment banks. He has the ultimate insider’s perspective, having previously worked at the world’s biggest bond trader PIMCO, the US Treasury—where he managed the 2008-09 TARP bank bailout—and Goldman Sachs. The reception he received from CNBC, which is leading the campaign to block Glass-Steagall, might indicate that he is now viewed on Wall Street as a traitor.

What does this mean for Australia?

It means that the Big Four banks and APRA are setting Australians up for a disaster. APRA boss and BIS apparatchik Wayne Byres is parroting Mark Carney’s and FSB’s lies on solving TBTF and financial stability, while covering for the continued reckless gambling by our major banks that is a threat to the entire Australian financial system. For instance, APRA exaggerates how safe Australia’s banks are; gives the Big Four carte blanche to target mum-and-dad investors in super funds etc. with risky bail-in bonds that look flash but can become effectively worthless in a heartbeat; and claims to have been caught a bit by surprise” at evidence of lax bank lending standards that it is supposed to police—meaning it doesn’t.

All of this adds up to a dangerous mess that must be solved now, before the next banking meltdown—which is imminent. The only solution is a full Glass-Steagall banking separation, of commercial from investment banking: rather than making bank customers into airbags to save the banks from a crash, as bail-in does, Glass-Steagall forces the banks with deposits to drive safely to protect their customers.

Click here to read the CEC’s comprehensive analysis of the bail-in scam: ‘Bail-in’: They plan to steal your deposits and pensions!

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