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New Bank Bail-in System for European Union; Investors Now on the Hook

Reading Time: 3 minutes by on January 7, 2016 Finance, News, Regulation

New rules across the European Union came into effect January 1st which could have interesting implications for Bitcoin; no bank can be bailed out with public money until creditors have accounted for at least 8% of the lenders liabilities. This means investors and depositors will be forced to foot the bill for a failed bank, known as a “bail-in”. As soon as a deposit is made with a bank, the ownership of money is transferred to them and banks exposed to huge losses in derivatives could use a “bail-in” to stay afloat. Also, the new measure could discourage investors from investing in banks as they will be at the mercy of regulatory decisions in the event of a restructuring. Anyone with more than €100,000 in a European bank account is now at risk, representing a positive fundamental theme for Bitcoin across the region.

Italy and Portugal acted quickly to save several banks before this rule came into effect; four small banks in Italy have been propped up using the National Resolution Fund. The Italian government acted quickly to implement this fund as the EU rules would have meant that around 1 million savers would have suffered losses. Portugal recently moved five bonds from a ‘healthy’ bank and reassigned them to fill a €1.4 billion ‘black hole’ in Novo Banco’s balance sheet. This represents a dangerous precedent in Europe as selected bondholders are filling this ‘black hole’ instead of all bondholders receiving equal treatment..

In October, the European Commission took legal action against six member states after they failed to integrate the EU’s “bail-in” laws into national legislation, which demonstrates how eager the EU was to get this new measure passed.

Another Financial Crisis?

Should fears of another financial crisis be the impetus behind the bail-in measures, Europeans could move their paper assets into virtual currencies to insulate themselves from a fallng victim to this manoever. If suh dramatic measure are used, we would see money flow into virtual currencies, similar to what happened in Cyprus back in 2013. BTC-USD peaked around $1200 as Cypriots scrambled to protect their wealth and Bitcoin ATM’s started to spring up across the country.

Spanish, Italian and Portuguese banks are among those that face the highest risk of being prescribed this new measure. France, Ireland and the UK are also exposed to higher risk in their financial sectors, relative to the rest of Europe. Derivatives are excluded from this new measure and are not subject to a bail-in. Some have implied that this bail-in measure will be used to fund a bank in the event of huge derivatives losses on their balance sheet; depositors will have to take a ‘haircut’ and there will be political backlash.

Interestingly, the Federal Reserve in the US took a similar position by curtailing its emergency lending powers in November. New rules, as part of the Dodd-Frank legislation, prevent the Federal Reserve from acting as the lender of last resort as it did in 2008 when it saved AIG and Bear Stearns. Stanley Fischer, former Vice Chairman of the Federal Reserve, highlighted in April that important banks in the US will have to issue bail-inable debt to allow insolvent banks to recapitalize themselves.

As these new rules go into effect in the EU, they represent a dormant fundamental force that has the potential to widen the adoption of bitcoin and push the price higher. Similar steps are being taken in the US. If bail-in measures is used, we might expect to see a similar dynamic for BTC-USD that was experienced when Cyprus was subjected to a bail-in. Could a bail-in which addresses a new financial crisis lead to new highs for Bitcoin?

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