The global derivatives market is estimated to be between $700 Trillion and $1.5 Quadrillion in notional value.
The US derivatives market is approx. $350 Trillion (notional).
Here is a major clue to what is to come:
The banks took advantage of the Government’s near shutdown in December 2014 and demanded that the bill include a written by Citigroup get passed that changes the Dodd-Frank Act to put taxpayers on the hook to cover derivatives bets by banks. The top 5 banks have over 93% of all US derivatives… surprise, surprise, they are:
Bank of America
This amounts to $231.4 Trillion in notional value backstopped by taxpayers.
Bail-in is the new bail-out.
Text from House Bill 83 passed December 17, 2014:
[[Page 128 STAT. 2378]] Sec. 630. Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8305) is amended-- (1) in subsection (b)-- (A) in paragraph (2)(B), by striking ``insured depository institution'' and inserting ``covered depository institution''; and (B) by adding at the end the following: ``(3) Covered depository institution.--The term `covered depository institution' means-- ``(A) an insured depository institution, as that term is defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); and ``(B) a United States uninsured branch or agency of a foreign bank.''; (2) in subsection (c)-- (A) in the heading for such subsection, by striking ``Insured'' and inserting ``Covered''; (B) by striking ``an insured'' and inserting ``a covered''; (C) by striking ``such insured'' and inserting ``such covered''; and (D) by striking ``or savings and loan holding company'' and inserting ``savings and loan holding company, or foreign banking organization (as such term is defined under Regulation K of the Board of Governors of the Federal Reserve System (12 CFR 211.21(o)))''; (3) by amending subsection (d) to read as follows: ``(d) Only Bona Fide Hedging and Traditional Bank Activities Permitted.-- ``(1) In general.--The prohibition in subsection (a) shall not apply to any covered depository institution that limits its swap and security-based swap activities to the following: ``(A) Hedging and other similar risk mitigation activities.--Hedging and other similar risk mitigating activities directly related to the covered depository institution's activities. ``(B) Non-structured finance swap activities.-- Acting as a swaps entity for swaps or security-based swaps other than a structured finance swap. ``(C) Certain structured finance swap activities.-- Acting as a swaps entity for swaps or security-based swaps that are structured finance swaps, if-- ``(i) such structured finance swaps are undertaken for hedging or risk management purposes; or ``(ii) each asset-backed security underlying such structured finance swaps is of a credit quality and of a type or category with respect to which the prudential regulators have jointly adopted rules authorizing swap or security-based swap activity by covered depository institutions. ``(2) Definitions.--For purposes of this subsection: ``(A) Structured finance swap.--The term `structured finance swap' means a swap or security-based swap based on an asset-backed security (or group or index primarily comprised of asset-backed securities). ``(B) Asset-backed security.--The term `asset-backed security' has the meaning given such term under section [[Page 128 STAT. 2379]] 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).''; (4) in subsection (e), by striking ``an insured'' and inserting ``a covered''; and (5) in subsection (f)-- (A) by striking ``an insured depository'' and inserting ``a covered depository''; and (B) by striking ``the insured depository'' each place such term appears and inserting ``the covered depository''.
The Canadian derivatives market has a notional value of $11.4 Trillion. This compares to our Federal debt of $635 Billion.
In terms of what it means to you as a depositor, here’s a recap:
- When you deposit money in the bank, your money becomes the asset of the bank. You become anunsecured creditor of said bank.
- When a bank fails and their liabilities need to be settled and creditors paid, it is done according to creditor seniority. As a depositor (unsecured creditor), you are the bottom of the pile. To add insult to injury, derivative bets between financial institutions are considered super senior and they all get settled first. That’s right. Read this one more time: those institutions which are derivatives counter-party to the failed bank get to pick at the carcass first.
- The bail-in regime would ensure that shareholders of a failed bank get wiped out first (right thing to do), bondholders get a haircut and depositor’s money gets bailed in. The if, how-much and exact order of ‘sacrifice in order to save the bank’ for each group of creditors involved would vary depending on the circumstances at the time.
- If you think CDIC/FDIC and other deposit insurance schemes would be your savior, think again. The amounts in these insurance systems amount to a few drops in the bucket when something big blows up. As made abundantly clear in the 2008 fiasco, the entire FDIC would have vaporized in a matter of days if the government did not step in to bail out the banks. Remember, ALL of the big banks, including non-banks such as Goldman Sachs which got turned into a ‘bank’ in order to get bail-out money, would have failed in 2008.
- If you think bank failures won’t happen in Canada because it did not in 2008, think again. Just because it did not last time does not mean that it won’t next time. Besides, until details get declassified decades down the road, us common folks will never find out what was done behind the scene between the government and the banks at the height of the last crisis. By the way, the people in Cyprus did not think a bail-in would happen to them either. Nor did the Italians. Or Austrians (check out the latest bail-in actions in Europe here).
- The most fundamental requirement for a functioning fractional reserve banking system is the confidence that depositors feel their money is safe in the banks. The minute that confidence disappears, depositors would pull their money out and a bank-run would ensue. For that simple reason, no bank or banking regulator would ever warn the public that a bank might be in danger of failing. In other words, take it as a given that you as a depositor would be the last one to find out.