Andrew Ford, of Integrity Research Group in Tokyo, Japan, offers his opinions on the EU economy and banking system.
(1888PressRelease) February 18, 2016 - Most people are familiar with bailouts these days, after the global economic crisis forced many governments to rescue private institutions. But, there's another term that's becoming increasingly common in the financial world; "bail-in". In this article, we'll take a look at what a bail-in is and what it means for investors.
On January 1st, 2016 the EU implemented a new bank-restructuring directive.
Banks on the verge of collapse will be forced to tap their shareholders, bondholders and biggest customers for cash before falling back on taxpayer bailouts under an agreement hammered out by European Union members.
The agreement is intended to shield taxpayers from another round of crippling bank bailouts of the kind that took place in 2008 and also avoid a re-run of the Eurozone crisis where troubled banks and heavily indebted governments have become inextricably linked. Under the regime, there is a clear pecking order for collapsing banks: shareholders are first; certain types of bondholders; and then customers who have deposits over the level of €100,000.
This new system is based on the Cyprus bank bail-ins that we witnessed a few years ago. If we remember, money was grabbed from anyone that had more than 100,000 euros in their bank accounts in order to bail out the financial institutions.
Now the exact same principles that were used in Cyprus apply to all of Europe. And with the entire global financial system teetering on the brink of chaos, that is not good news for those that have large amounts of money stashed in European banks. Any time a bank in Europe fails, they are going to come after private bank accounts once the shareholders and bond holders have been wiped out and as we have seen in the past, these rules can change overnight in the midst of a major crisis.
They may be promising that those with under 100,000 euros will be safe right now, but that doesn't necessarily mean that it will be the case. It is also important to note that there has been a really big hurry to get all of this in place by January 1st 2016. In fact, at the end of October 2015 the European Commission actually sued six nations that had not yet passed legislation, adopting the new bail-in rules.
At Integrity, thinking about bail-in vs. bail-out, we see the following issues in portfolio management. First, credit analysis is important. Risk needs to be identified and evaluated with the highest standard of integrity. In a private firm, one can give counsel to banking clients and portfolio-management clients and act to sell securities in which there may be very early warning signs of credit deterioration. From a portfolio-management point of view, one should not wait around. Our approach is to run quickly from credit deterioration and hope it does not get worse. Let someone else take that risk, not our clients.
The second issue is how to deal with exposure of investments to the financial sector and banks. Clearly, a transition from bail-out to bail-in will mean that some banks will do much better than others, and very large banks may do much better than smaller ones. Redeployment of investments within the financial sector is an issue that has to be re-examined.
Andrew Ford, of Integrity Research Group in Tokyo, Japan, offers his opinions on the EU economy and banking system. 
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