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My wife and I have had a couple of conversations already about the Cyprus mess. Now leaders in Europe are saying that they may again do this in other countries that are having serious problems like Italy and Spain. Ie, if a bank fails, they will tax the depositors to save the bank, rather than being bailed out by the ECB. This to me again gives a green light, allowing the bankers to be irresponsible and let others pay for their mistakes. Now I'm no spring chicken. My guess is that this alternative has been discussed in the higher echelons of the banking industry in the west. Does this make you wonder about keeping money in banks. Since the interest rates that they pay on deposits are so small, you're basically just putting your money in the bank for safe keeping, and that's about it. Well, we have to ask the question today. Is the money actually safe?
Well you certainly wouldn't risk uninsured funds in there. I still firmly believe the next crisis gets solved in a totally different manner. Winding down a bank and taxing its largest depositors is certainly not an ideal situation, but when circumstances dictate it and clearly lay out its the least painful path then its going to happen. I don't think this is a least painful path for any other country though. Unless they somehow let people sneak their money out of Cyprus while exiting the Euro, what happened to the large deposits really wasn't the worst case scenario. If Cyprus went to its own currency there would have been probably a 50% haircut in value because so much money in Cyprus would have taken whatever exchange rate the market would give them just to get their money out. It might have been a 60-70% devaluation. So a 30% tax on uninsured deposits really wasn't a terrible deal.
Certainly one could read into this a lot of things and maybe they are unsettling to a degree, but nothing in crisis handling follows a straight line. How the US settled its financial crisis was different than how others would do it. And no matter what there will always be 2nd guessing and people who hated what happened. People are still whining about bailouts and TARP when both proved to be fairly effective at containing the crisis which could have ended far worse than it did.
Well you certainly wouldn't risk uninsured funds in there.
... Winding down a bank and taxing its largest depositors .... So a 30% tax on uninsured deposits really wasn't a terrible deal.
Technically it was not a tax, no new tax legislation was required, only new legislation to prevent capital flight while the "haircut" is applied: those with uninsured deposits above €100,000 will simply lose a portion of that as de facto stakeholders in the bank, as per existing legislation.
One of the lessons here is that people must realize that depositors, especially those above the insured amounts, are stakeholders in the banks. The disconnect is that deposit holders have little or no say on bank business policies: even above €100,000 or $250,000 is insignificant compared to a bank's total capital and influence on policy.
Someone in a recent thread mentioned credit unions, sort of mutual banks where depositors are transparently stakeholders and the business is limited to deposit-taking and lending - and not raising capital on financial markets and speculating with both that and depositors' money - the way it used to be for the majority, if not all, banks in the US during the Glass-Steagall era.
What is disturbing is that EU policymakers and Cyprus government negotiators even contemplated a tax on insured deposits, though it was unanimously rejected by the Cypriot parliament.
However, back in 1991 or 1992, Italy, during a fiscal crisis, imposed a sudden tax on deposits, decreed on a weekend and implemented on a Monday, but a fraction of 1%, therefore not met with total outrage, just some irritation. Nonetheless, that is at least one precedent that I know of. In other countries, depositors have lost money on bank failures, I know of one case in South America.
To answer the question, we in the US no longer live in a risk-free era of stable industrialization with no competition, diversification is still key, and that includes cash in banks.
Nevertheless, for as long as the consumer spending model is the basis of the industrialized economy, I believe that deposits will remain protected and a reasonable flow of credit will remain intact in the US and most major countries.
They consider $100K (USD) a large depositor ? Business people, churches, retired people could easily have had over $100K (USD) deposited and now they've lost all above that.
Large depositors are probably going to move whatever is left of their money, I mean the governments money, into "safer" countries.
Beyond that, I have no clue. Although, if we see this again, the depositor tax, I am pretty sure almost no large depositor or entity will keep more money in Europe than what they have to ever again. Some entities won't have that option.
The banks in Cyprus are still closed. From the last update I saw it was Thurday this week for the bank holiday to end. This is the 3rd time at least they have changed the bank holiday to prevent a bank run.
They consider $100K (USD) a large depositor ? Business people, churches, retired people could easily have had over $100K (USD) deposited and now they've lost all above that.
It is also being reported that no money will be allowed to leave the country?
For now yes. You have to set up capital controls or else it becomes a corrupt race to get your money out. There is only so much cash on hand, if 75% of the deposits get withdrawn day one the bank fails. Even worse say there is only 20% liquid asets on hand. Who gets the liquid assets? Those who are given preference by the bank. Usually to get this preference a bribe or something like it is passed along. When banks are under a run capital controls usually work well to quell the panic.
There is a bit of a risk taken in terms of how it affects other banking systems, but I dont see any way you open banks without controls.
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