Bank ‘bail-ins’ and the new international bail-in regime that impose losses on bank investors, bondholders and even depositors may undermine the confidence of small savers in the banking system, a senior Bank of Italy official warned on Wednesday.

Protect Your Savings From The Wrecking Ball

“The bail-in can exacerbate – rather than alleviate – the risks of systemic instability caused by the crisis of individual banks,” Carmelo Barbagallo, head of supervision at the central bank, astutely noted during a hearing before the Chamber of Deputies in Italy according to Reuters:

“It can undermine confidence, which is the essence of banking; transfer the costs of the crisis from taxpayers at large to a smaller category of people no less worthy of protection – small investors, pensioners – who directly or indirectly invested in bank liabilities” said Barbagallo.

The comments are notable as they are the first time that a central bank official in the EU, and indeed, internationally has voiced concerns about the coming bail-in regime and the impacts on ordinary citizens – small businesses, investors, savers and pensioners.

Central bank supervisor, Barbagallo is an interesting character in that he does not appear to be your typical central banker – most of whom today seem to be career bankers with Goldman Sachs and other Wall Street or City of London bankers. Indeed, his background is as a worker who rose through the ranks to become a senior trade union official.

In that capacity, he has been courageous and unafraid to take on corrupt vested interests including the mafia in Sicily. He has denounced crime and intimidation by the Mafia which have resulted in attempts on his life according to Wikipedia.

We have long warned of the failure to understand the negative impact that bail-ins will wreak on western society and the real world consequences on middle class savers and investors and even more importantly on the small to medium enterprise sector – the backbone of most economies internationally.

A tragic example of this was seen in Italy in recent days when a pensioner committed suicide after having his life savings wiped out in a bank bail-in.

A pensioner from near Rome, hanged himself after his €100,000 (£72,000; $110,000) investment in Banca Etruria bonds were wiped out in a bail-in. A suicide note was left by the pensioner criticising the bank.

According to the BBC:

Italian Prime Minister Matteo Renzi has defended his government’s rescue of four Italian banks – but voiced sadness over an elderly investor’s suicide. Mr Renzi said the €4 billion rescue last month had to be done otherwise thousands of jobs would have been lost. About 130,000 bank shareholders and bondholders lost their investments.

The leader of the far-right opposition Northern League, Matteo Salvini, called the pensioner’s death “state suicide” in a tweet.

“A pensioner kills himself because he lost his life savings due to Banca Etruria and the absent government. State suicide,” his tweet said.

Correspondents say Mr Renzi acted quickly because in January, the EU is tightening the rules on bank rescues – they will force losses on depositors holding more than €100,000, as well as bank shareholders and bondholders.

Central bank supervisor Carmelo Barbagallo, quoted by Reuters news agency, said letting the four banks fail under those new EU rules next year would have meant “sacrificing the money of one million savers and the jobs of nearly 6,000 people”.

Mr Renzi said he supported a parliament decision to investigate “what has happened in the Italian and European banking systems in the last few years”. He called for “every effort” to “clarify the responsibilities of the past”.

The EU is at an advanced stage in forcing countries to ratify bail-in legislation. The legislation is being devised to protect the larger banks against the interests of depositors, taxpayers and the wider economy.

The various “state guarantees” for deposits or deposit insurance (generally a big round figure of €100,000 in most EU states and £75,000 in the UK) is purely arbitrary and has lulled the public into a false sense of security. The “guaranteed” amount can be adjusted lower with the stroke of a pen.

The ramifications of bail-ins have not been thought through. With central banks taking unprecedented measures ostensibly to fight deflation, it is important to realise that bail-ins would create massive deflation as they would impact hugely on consumer, investor and business confidence.

By taking cash and capital from savers, investors, pensioners – and especially small and medium enterprises – there would be very negative consequences for future spending and investment, consumer confidence, trade and commerce that would likely lead to a another deflationary spiral.

Diversification of savings and investments remains the best way to protect against the coming bail-in regime.

DAILY PRICES

Today’s Gold Prices: USD 1067.20, EUR 973.86 and GBP 704.93 per ounce.
Yesterday’s Gold Prices: USD 1072.00, EUR 979.44 and GBP 706.40 per ounce.
(LBMA AM)

Gold fell by a dollar yesterday to close the day at $1071.70. Silver lost $0.04 to $14.11. Platinum lost $2 to $852.

Gold prices are drifting lower today, after closing flat over the last two sessions. Silver is also lower, trading close to $14. Platinum is lower too but palladium has eked out a 1% gain.

Gold fell to a session low of $1,062.90/oz and looks vulnerable to further falls to the recent low of $1,053.20/oz as markets fixate on the Federal Reserve interest rate decision next Wednesday.

Declining activity in the U.S. federal funds futures market in recent weeks signal doubts whether the Fed will be able to achieve a higher target range when it attempts to end its ZIRP (zero interest rate policy) experiment.

Should the much heralded and anticipated 25 basis point rise materialise as is expected, then we expect gold could show further weakness and test support which is likely to be seen at the $1,000/oz level.

Given the very poor technical position, poor sentiment in western markets and momentum – which can be a powerful thing – $1,000/oz gold seems quite possible and gold appears to be gravitating to this big round number.

Chinese New Year looms and demand from China should provide support above the $1,000 level and should spur gains in January. Another pillar of support is very strong demand for bullion – particularly from Germany, India and China.

The current bout of weakness is another opportunity to acquire gold on the dip and geometrically dollar cost averaging remains the prudent way to acquire an allocation to gold.