They put it in writing, then they did it

In 2010, and in 2011, I was in Cyprus for a series of meetings, with bankers, wealth managers and investment advisors, talking about what I usually talk about, gold, private vaults, and the jurisdictions where wealth can sit outside the banking system. Somewhere in those conversations the subject of bail-ins came up. I had been reading the papers on it, the ones the authorities were publishing themselves, and I said, as gently as the idea allows, that their clients could one day be made to pay for the banks’ mistakes directly, with a slice taken straight from their accounts. A person who wanted to be certain of keeping what was theirs, I suggested, might hold some part of it in gold, outside the banking system altogether. What I met was the polite, faintly pained patience you extend to a guest who has wandered off the point. An interesting idea, everyone in the room agreed, and safely theoretical.

The authorities had put all of it on the record themselves. A deputy governor of the Bank of England, the man who chaired the international work on failing banks, had given speeches sketching a new tool.¹ In a crisis, the loss from a failing bank could be taken straight out of its creditors, on a rapid timetable, while the bank stayed open. By early 2010 the tool had a name in print, written up in the Economist by two bankers who had sat through the Lehman weekend.² They called it bail-in, the mirror image of a bailout; this time the bank’s own depositors and creditors would pay. By late 2011 the Financial Stability Board had hardened it into an agreed international standard, endorsed by the leaders of the G20,³ and a year later the IMF published it under that very title.⁴ It was all there, in writing, free to be read by anyone who cared to.

A sentence in a policy document reads like weather on another continent.

The morning it became true

In March of 2013 the people of Cyprus read it for the first time, on the morning it stopped being theoretical. The banks stayed shut. The cash machines gave out a little, and then less, and then 100 euros a day, while queues formed in front of locked doors for the better part of two weeks. When it was over, every insured deposit under 100,000 euros had been spared, and on the deposits above that line, at the island’s largest bank, something close to half was gone.⁵ Taken lawfully, under a power that had been put in writing and agreed years earlier, while nearly everyone who would feel it went on assuming it could never reach them.

One detail stays with me. The depositors who lost had every fact in front of them. The tool was public knowledge, debated in the financial press and signed at a summit with the cameras there to record it. What they lacked was the willingness to believe the warning had anything to do with them, and it is the willingness most of us lack. A sentence in a policy document reads like weather on another continent; it is almost impossible to feel that it will ever arrive at your own door, until the morning it does, and by then the only thing left to do is stand in the queue.

The next one is already in writing

I tell the story because the same thing is happening now, further down the same road. The institutions that recorded bail-in are now recording something larger. The capabilities of programmable money, what a digital currency issued by a central bank can be made to permit, refuse, expire or condition, are being set out as I write, in the working papers and live pilots of the very bodies that will decide how it gets used. These are the authors’ own descriptions, in the authors’ own documents. The General Manager of the Bank for International Settlements, the central bank for central banks, has described it matter-of-factly. With a central bank digital currency, the central bank “will have absolute control on the rules and regulations that will determine the use” of the money, “and also we will have the technology to enforce that.”⁶ A deputy managing director of the IMF has described that machinery as a way to make money “precisely targeted” to what people can own and what they may spend it on.⁷ The pattern is the one that played out in Cyprus, an option, written in plain language by the people who would wield it, well before the morning it becomes routine.

What to do about it, the small cost of preparing set against the large cost of being wrong, is a short reckoning I have put on its own page. I want to fix one idea in place before you go. The warning, this time as last, is published in the open. Cyprus proved that much. We are told early enough; we always are. The only question is whether you believe it while there is still time to act.

I was in those rooms, making a case that sounded like a stretch, and I understood the instinct to wave it away, because I share it. It is easy to read every word of a warning, follow the reasoning to its end, and still assume the people who wrote the power down will choose never to use it. Reasonable in the moment, and costly in the end.

The bail-in power was written down, there for anyone to read, and then one day it was used. The digital version is documented now, in the same plain language, and it is being built while you read this. The words on the page already spell out what it will be able to do to the money we hold. We have been told in advance, in our own language. The hard part is believing that one day it will. We should not bet that it will not, or that the cost will come due on a morning of our choosing. None of us gets to choose.

Footnotes

1. Paul Tucker, then Deputy Governor of the Bank of England and chair of the international resolution work, set out a “super special resolution” that could haircut uninsured creditors in a going concern, in speeches in 2009 and 2010. Source: Tucker, “Resolution of large and complex financial institutions: the big issues,” Bank of England, March 2010, https://www.bankofengland.co.uk/-/media/boe/files/news/2010/march/resolution-of-large-and-complex-financial-institutions-the-big-issues-speech-by-paul-tucker.pdf ↩

2. The term “bail-in” was coined by Paul Calello and Wilson Ervin of Credit Suisse in “From bail-out to bail-in,” The Economist, 28 January 2010, https://www.economist.com/finance-and-economics/2010/01/28/from-bail-out-to-bail-in ↩

3. Financial Stability Board, “Key Attributes of Effective Resolution Regimes for Financial Institutions” (November 2011), endorsed by the G20 at the Cannes summit. Source: https://www.fsb.org/publications/r_111104dd.pdf ↩

4. IMF Staff Discussion Note SDN/12/03, “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions,” 24 April 2012 (a staff note, the authors’ views, not IMF policy). Source: https://www.imf.org/external/pubs/ft/sdn/2012/sdn1203.pdf ↩

5. Cyprus, March 2013: banks closed for roughly two weeks; ATM withdrawals capped near 100 euros a day; uninsured deposits over 100,000 euros at Bank of Cyprus were cut by about 47.5%, while insured deposits were protected; capital controls, the first inside the eurozone, were lifted in April 2015. Sources: Yale Program on Financial Stability, https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1533&context=journal-of-financial-crises ; BBC, https://www.bbc.com/news/business-21982652 ↩

6. Agustín Carstens, General Manager of the Bank for International Settlements, at an IMF cross-border-payments panel, 19 October 2020 (recording: https://www.youtube.com/watch?v=ERQ5fttvbeg). ↩

7. Bo Li, Deputy Managing Director of the IMF, at the IMF seminar “Central Bank Digital Currencies for Financial Inclusion: Risks and Rewards,” 14 October 2022, on money “precisely targeted” to “what kind of use this money can be utilized.” Source: https://meetings.imf.org/en/2022/Annual/Schedule/2022/10/14/imf-seminar-cbdcs-for-financial-inclusion-risks-and-rewards ↩