The plan to ensure that the state is no longer responsible for insuring deposits has been readied by the Austrian government in conjunction with the EU two years ago according to Die Presse.
Currently, Austrians have their bank deposits guaranteed to a value of €100,000 – the first half to be provided by the failing bank and the other by the state. From July, however, the state will be removed from the process and a special bank deposit insurance fund is to be set up and paid into by banks to meet potential shortfalls.
The fund will be filled gradually over the next ten years to a value of €1.5 billion. In the the event of a failure of a major bank in the intervening period the legislation will allow the fund to borrow internationally although who will provide such funding and on what terms is not clear, according to Austria’s Die Presse.
However, even when the scheme is fully funded it is clear that €1.5 billion will be woefully inadequate to deal with a bank failure.
€1.5 billion amounts to a mere 0.8% of total deposits in Austria. It is highly unlikely that deposits of any major bank would be adequately covered and in the event of multiple concurrent bank failures it is likely that most savers would be wiped out.
Die Presse gives the example of Bank Corp in Bulgaria. When that bank failed it had €1.8 billion in deposits but there was only €1 billion in the deposit insurance fund.
On a positive note “inheritances, real estate transactions, a dowry or a divorce [will be] be protected for three months, even up to an amount of 500,000 euros,” according to Die Presse (via google translate).
It is telling that, as Die Presse reports, the framework for the legislation was agreed in Europe two years ago and the legislative change has to take place by this summer. It was on June 27th, 2013 that Irish Finance Minister Michael Noonan made his infamous declaration that “bail-in is now the rule.”
The Die Presse story suggests that the Austrians may have gotten a derogation or an exemption from the new bail-in legislation which was enacted in 2013. “Bail-in is now the rule” as Irish finance Minister Michael Noonan warned in June 2013. Noonan admitted then that the move to not maintain deposits as sacrosanct was a “revolutionary move.” That it was and yet investors and depositors remain very unaware of the risks of bail-ins both to their own deposits but also to the wider financial system and economy.
At that time average depositors with deposits of less than €100,000 were given no indication that their savings may be at risk even as EU institutions were working on removing state liability for such deposits.
Romania’s Bursa newspaper points out that this is not some monetary experiment being foisted upon some peripheral Eurozone country. Austria is regarded as being part of the EU’s “hard core”.
What unfolds in Austria will likely follow across the EU. It may be that Austria was prompted to enact this legislation first among its European partners precisely because it anticipates major banks failures in the wake of the failure of its “bad bank”, Heta.
Also many Austrian banks have large exposures to Eastern European countries and property markets. Austrian banks are the most exposed to potential losses from tougher sanctions on Russia according to Fitch and the IMF. Swedish, French and Italian lenders are also vulnerable, the International Monetary Fund also warned.
Deposits in the insolvent banking system are no longer safe. So where is one to place one’s savings?
As Germany’s Deutsche Wirtschafts Nachrichten opines “depositors will have to thoroughly research the situation of the bank they place their savings in”. It adds, “this task is extremely difficult, because of the muddy financial statements and of the complexity of the interdependencies in the banking system”.
While Austria may be the first in enacting this legislation there is no guarantee that savers, particularly in the peripheral nations, will receive any indication that their deposits may be at risk.
Emergency legislation can be drawn up over-night – as was the case when Ireland was “bailed-out” or rather Ireland’s banks were bailed out and Ireland’s tax payers were bailed in. The developing bail-in regimes, means that soon individual and corporate depositors could see their savings and capital ‘bailed in’.
These are important developments. Average savers can no longer rely on the state to protect their deposits. They provide a good reason for depositors to allocate some of their funds to physical gold stored outside of the banking system, in the safest jurisdictions in the world.