Cyprus Model of Deposit Haircuts Spread to Brazil

Bank depositors beware. 

Deposit haircuts or “bail-ins” are becoming a global standard. Recently political authorities of New Zealand, Canada and European countries as Spain, Italy and others have announced their openness to embrace the Cyprus bail-in model of confiscating bank deposits when a crisis emerges.

Now this seems to have spread to Brazil. 

Brazil's authorities has essentially acknowledged of the existence and of the risks of bubbles.

From Reuters:

The Brazilian government, concerned about systemic risk in the rapid growth of banking assets, will propose legislation to make shareholders, bondholders and depositors pay for rescuing troubled banks and shield taxpayers from the cost of bailouts.

Central Bank President Alexandre Tombini told a banking seminar on Monday that the legislation aims to mitigate "moral hazard" by forcing banks to assume full responsibility for their losses in what is known as a "bail-in." It was applied in Cyprus to stop a run on the banks and Canada is also considering rules to deal with potential bank failures.

In the case of Brazil, the proposed bill underscores mounting unease among regulators with the rapid pace of growth of banking assets in Latin America's largest economy in recent years. Some banks might be "too big too fail" in Brazil, and the need to discourage irresponsible behavior could be higher now than before as state-run lenders expand their balance sheets three times the pace of their private-sector peers.

First, governments inflate bubbles via a cauldron of policies, such as zero bound rates, QEs,  subsidized loans to privileged sectors, tax credits on debts, and etc.. Yet all these incentivize or promote “irresponsible behavior” or yield chasing through credit expansion.

Then, they use such bubbles to justify the confiscation of depositors, bondholders and shareholders assets as punishment in order to rescue banksters.

Politicians use the smoke and mirrors rhetoric of supposedly preventing taxpayer exposure as camouflage for such actions.

 

A Tagalog idiom for this is “Na-prito sa sariling mantika” or translated in English “fried in one’s own fats”. 

Depositors are now being framed up as fall guys for government predation. 

Yet as bubble busting episodes transitions into a domino effect worldwide, more nations will likely resort to “bail-ins” or deposit haircuts. 

Alternatively, this will also induce a growing distrust on the banking system which should add on more uncertainties and volatility into the marketplace.

Which of East Asia-ASEAN corridor will be next?

 

Nonetheless, desperate governments are increasingly applying desperate measures.