Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Banking Union Time Bomb:
Eurocrats Authorize Bailouts AND Bail-Ins
By Ellen Brown
Al-Jazeerah, CCUN, April 6, 2014
“As things stand, the banks are the permanent government of
the country, whichever party is in power.”
– Lord Skidelsky,
House of Lords, UK Parliament, 31 March 2011)
On March 20, 2014,
European Union officials
reached an historic agreement to create a single agency to handle
failing banks. Media attention has focused on the agreement involving the
single resolution mechanism (SRM), a uniform system for closing failed
banks. But the real story for taxpayers and depositors is the heightened
threat to their pocketbooks of a deal that now authorizes both bailouts
and “bail-ins” – the confiscation of depositor funds. The deal involves
multiple concessions to different countries and
may be illegal under the rules of the EU Parliament; but it is being
rushed through to lock taxpayer and depositor liability into place before
the dire state of Eurozone banks is exposed.
provisions were agreed to last summer.
According to Bruno Waterfield, writing in the UK Telegraph in June
Under the deal, after 2018 bank shareholders will be first
in line for assuming the losses of a failed bank before bondholders and
certain large depositors. Insured deposits under £85,000 (€100,000) are
exempt and, with specific exemptions, uninsured deposits of individuals
and small companies are given preferred status in the bail-in pecking
order for taking losses . . . Under the deal all unsecured bondholders
must be hit for losses before a bank can be eligible to receive capital
injections directly from the ESM, with no retrospective use of the fund
As noted in my earlier articles,
(European Stability Mechanism) imposes an open-ended debt on EU member
governments, putting taxpayers on the hook for whatever the Eurocrats (EU
officials) demand. And
it’s not just the EU that has bail-in plans for their troubled
too-big-to-fail banks. It is also the US, UK, Canada, Australia, New
Zealand and other G20 nations. Recall that
a depositor is an unsecured creditor of a bank. When you deposit money
in a bank, the bank "owns" the money and you have an IOU or promise to
Under the new EU banking union, before the taxpayer-financed
single resolution fund can be deployed, shareholders and depositors will
be "bailed in" for a significant portion of the losses. The bankers thus
win both ways: they can tap up the taxpayers’ money and the depositors’
The Unsettled Question of Deposit Insurance
least, you may say, it’s only the uninsured deposits that are at risk
(those over €100,000—about $137,000). Right?
According to ABC News, “Thursday's result is a compromise that differs
from the original banking union idea put forward in 2012. The original
proposals had a third pillar, Europe-wide deposit insurance. But that idea
European Central Bank President Mario Draghi,
speaking before the March 20th meeting in the Belgian capital, hailed the
compromise plan as “great progress for a better banking union. Two pillars
are now in place” – two but not the third. And two are not enough to
protect the public.
As observed in The Economist in June 2013, without Europe-wide deposit
insurance, the banking union is a failure:
[T]he third pillar, sadly
ignored, [is] a joint deposit-guarantee scheme in which the costs of
making insured depositors whole are shared among euro-zone members. Annual
contributions from banks should cover depositors in normal years, but they
cannot credibly protect the system in meltdown (America’s prefunded scheme
would cover a mere 1.35% of insured deposits). Any deposit-insurance
scheme must have recourse to government backing. . . . [T]he banking
union—and thus the euro—will make little sense without it.
deposits could be at risk in a meltdown. But how likely is that?
likely, it seems . . . .
What the Eurocrats Don’t Want You to Know
Mario Draghi was vice president of Goldman Sachs Europe before he
became president of the ECB. He had a major hand in shaping the banking
according to Wolf Richter, writing in October 2013, the goal of Draghi
and other Eurocrats is to lock taxpayer and depositor liability in place
before the panic button is hit over the extreme vulnerability of Eurozone
European banks, like all banks, have long been hermetically
sealed black boxes. . . . The only thing known about the holes in the
balance sheets of these black boxes, left behind by assets that have
quietly decomposed, is that they’re deep. But no one knows how deep. And
no one is allowed to know – not until Eurocrats decide who is going to pay
for bailing out these banks.
When the ECB becomes the regulator of the
130 largest ECB banks, says Richter, it intends to subject them to more
realistic evaluations than the earlier “stress tests” that were nothing
but “banking agitprop.” But these realistic evaluations won’t happen
until the banking union is in place. How does Richter know? Draghi himself
said so. Draghi said:
“The effectiveness of this exercise will depend on the availability of
necessary arrangements for recapitalizing banks ... including through the
provision of a public backstop. . . . These arrangements must be in
place before we conclude our assessment.”
Richter translates that to
The truth shall not be known until after the Eurocrats decided who
would have to pay for the bailouts. And the bank examinations won’t be
completed until then, because if any of it seeped out – Draghi forbid –
the whole house of cards would collapse, with no taxpayers willing to pick
up the tab as its magnificent size would finally be out in the open!
Only after the taxpayers – and the depositors – are stuck with the tab
will the curtain be lifted and the crippling insolvency of the banks be
revealed. Predictably, panic will then set in, credit will freeze, and the
banks will collapse, leaving the unsuspecting public to foot the bill.
What Happened to Nationalizing Failed Banks?
this frantic wheeling and dealing is the presumption that the “zombie
banks” must be kept alive at all costs – alive and in the hands of private
bankers, who can then continue to speculate and reap outsized bonuses
while the people bear the losses.
But that’s not the only
alternative. In the 1990s, the expectation even in the United States was
that failed megabanks would be nationalized. That route was pursued quite
successfully not only in Sweden and Finland but in the US in the case of
Continental Illinois, then the fourth-largest bank in the country and the
largest-ever bankruptcy. According to
William Engdahl, writing in September 2008:
[I]n almost every
case of recent banking crises in which emergency action was needed to save
the financial system, the most economical (to taxpayers) method was to
have the Government, as in Sweden or Finland in the early 1990’s,
nationalize the troubled banks [and] take over their management and assets
… In the Swedish case the end cost to taxpayers was estimated to have been
Typically, nationalization involves taking on the insolvent bank’s bad
debts, getting the bank back on its feet, and returning it to private
owners, who are then free to put depositors’ money at risk again. But
better would be to keep the nationalized mega-bank as a public utility,
serving the needs of the people because it is owned by the people.
As argued by George Irvin in Social Europe Journal in October 2011:
[T]he financial sector needs more than just regulation; it needs
a large measure of public sector control—that’s right, the n-word:
nationalisation. Finance is a public good, far too important to be run
entirely for private bankers. At the very least, we need a large public
investment bank tasked with modernising and greening our infrastructure .
. . . [I]nstead of trashing the Eurozone and going back to a dozen minor
currencies fluctuating daily, let’s have a Eurozone Ministry of Finance
(Treasury) with the necessary fiscal muscle to deliver European public
goods like more jobs, better wages and pensions and a sustainable
A Third Alternative – Turn the Government Money Tap
A giant flaw in the current banking scheme is that private
banks, not governments, now create virtually the entire money supply; and
they do it by creating interest-bearing debt. The debt inevitably grows
faster than the money supply, because the interest is not created along
with the principal in the original loan.
For a clever explanation of how all this works in graphic cartoon form,
see the short French video “Government Debt Explained,” linked
The problem is exacerbated in the Eurozone, because no one has the
power to create money ex nihilo as needed to balance the system, not even
the central bank itself. This flaw could be remedied either by allowing
nations individually to issue money debt-free or, as suggested by George
Irvin, by giving a joint Eurozone Treasury that power.
The Bank of England just
admitted in its Quarterly Bulletin that banks do not actually lend the
money of their depositors. What they lend is bank credit created on their
books. In the U.S. today, finance charges on this credit-money amount to
between 30 and 40% of the economy, depending on whose numbers you believe.
In a monetary system in which money is issued by the government and
credit is issued by public banks, this “rentiering” can be avoided.
Government money will not come into existence as a debt at
interest, and any finance costs incurred by the public banks' debtors will
represent Treasury income that offsets taxation.
New money can be added
to the money supply
without creating inflation, at least to the extent of the “output gap”
– the difference between actual GDP or actual output and potential GDP.
In the US, that
figure is about $1 trillion annually; and
for the EU is
roughly €520 billion ($715 billion). A joint Eurozone Treasury could add
this sum to the money supply debt-free, creating the euros necessary to
create jobs, rebuild infrastructure, protect the environment, and maintain
a flourishing economy.
Ellen Brown is an attorney, founder of the Public
Banking Institute, and a candidate
for California State Treasurer running on a state bank platform. She
is the author of twelve books, including the best-selling Web
of Debt and her latest book, The
Public Bank Solution, which explores successful public banking models
historically and globally.