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Showing posts from March, 2013

A failure of compassion

The deed has been done. A deal has been struck to wind up Laiki Bank and restructure the Bank of Cyprus. Deposits of less than 100,000 Euros are protected from loss, as are deposits at other banks. Deposits of over 100,000 Euros are frozen and will be seized in part or whole to pay the debts that Laiki Bank and Bank of Cyprus cannot pay - including the money lent to Laiki Bank by the ECB to keep it going even though it was obviously insolvent.

So Cypriot taxpayers and small savers are off the hook. Popular belief has it that those who will pay are rich Russian oligarchs, who are probably criminals and tax evaders and therefore deserve what is coming to them. Tax campaigners claim that as Cyprus was a tax haven, the destruction of its banking sector is only just and fair. Small savers across Europe breathe a sigh of relief at the news that their deposits are safe. Larger depositors cling to the Eurogroup's assurance that Cyprus is a "special case" and this will never happ…

Cyprus banks and UK deposits

I'm writing this brief explanation for those who are unsure about the status of deposits held in UK outposts of Cypriot banks, and to confirm the situation for people with deposits in Cypriot banks in Cyprus itself.

Bank of Cyprus UK
Bank of Cyprus UK is a UK-incorporated bank regulated by the FSA. It is a separate legal entity from its  Cypriot parent and has its own capital, which is ring fenced to make it unavailable for raiding to bail out its parent. Deposits in the Bank of Cyprus UK are insured under the UK's Financial Services Compensation Scheme. Since the UK is a member of the European Union, the UK's scheme is consistent with the European Union's rules for deposit guarantee schemes. Deposits in the Bank of Cyprus UK are therefore insured up to a limit of £85,000, and any claim would be made against the UK scheme.

As the Bank of Cyprus UK is a UK bank, the terms of the restructuring ordered for its parent, the Bank of Cyprus, do not apply. All deposits in the B…

The broken Euro

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Imagine you live in a prosperous country, with a lovely climate, beautiful beaches, blue seas. But there's something funny about this country. It doesn't have a functioning banking system.

You can put money into your bank, but you can't get it out again. At least you can, through ATMs, but only in very small amounts.

If you have money on deposit, you can't take the money out and close the account. And if it's a time deposit, when it reaches the end of its life, you can't have the money to spend. You have to roll it over into a new deposit.

You can't cash a cheque in a high street bank. You can't pay bills in a high street bank, either. And no high street bank is lending any money, so if you want a loan, forget it. In fact high street banks are not much use.

Your employer pays you in cash, because there are no electronic payments. Which is just as well, really, because you need cash. There are no automated payments such as direct debits, so you pay all y…

Sham guarantee

So you think small bank deposits are guaranteed, do you? That they are perfectly "safe"? Read what follows, and think again. 

The Eurogroup President's statement on Cyprus included the following commitment (my emphasis):
"The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000". Ok, so that's the standard line on deposit insurance. Small deposits, including current accounts, are safe from loss because they are 100% guaranteed by government.

Here's the President of Cyprus on the subject (again, my emphasis):
The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay. Indeed it would not. After all, the reason for the proposed depositor haircut is that the …

Sowing the wind

The terms of Cyprus's bank bailout have shocked the world. For the first time, small bank depositors will take a hit.

Small depositors have long been regarded as sacrosanct. Although in theory they rank alongside bondholders and large depositors in the queue for funds, in practice they have always been protected - usually by taxpayers.  There is a widespread belief that because small deposits are insured in nearly every developed nation, therefore they should not take losses when banks are bailed out instead of being allowed to fail. Depositors losing money when banks are kept afloat, when they would have escaped unscathed if the banks failed, seems both unfair and illogical.

Hence the reason for the "shock and awe" response to the Cyprus bailout terms. A 6.75% one-off "stability levy" will be imposed on deposits covered by deposit insurance (under 100,000 Euros). The levy on larger deposits will be 9.99% - not a great difference, really, and much less than mig…

Risk versus safety, bank reform edition

The Parliamentary Commission on Banking Standards has produced its second interim report. Predictably, the media homed in on its proposal to include provision in primary legislation for full separation of retail from investment banking across the entire UK banking industry if ring-fencing turned out to be a dud. Not that that would mean much - the only UK bank that still has a major investment banking arm is Barclays, and even that is being scaled down in favour of renewed emphasis on retail banking. In fact the way things are going, by the time the ring-fencing scheme is implemented it will resemble a plan to repair the door on an empty stable. The horses will have long since become Tesco burgers. Yawn.

But the report is actually far more interesting if you ignore ring fencing and look at the rest of it. It affords an extraordinary snapshot of the conflicting agendas of Government and Parliament at the moment. Government is in a hole, largely of its own making: the economy is stagnat…

The legacy systems problem

A comment I made on BBC 5Live's Wake Up To Money programme has attracted quite a bit of attention. It's quoted in the BBC's report about RBS's recent IT failure:
"We just have a lot of legacy systems out there," said Frances Coppola, a former RBS employee and an independent banking analyst.
"Some of those systems haven't been replaced for a long time," she said. And my colleague on the programme added the following:
"The bank has given too much priority to grand schemes and acquisitions, rather than running a day-to-day bank," said Alastair Winter, chief economist at Daniel Stewart Securities. Both of these remarks need further explanation, and to do so I need to talk about what I actually did in banking. I am usually described as a "former banker", but that isn't entirely true. I worked in systems. I started as an IT analyst/programmer, moved on into IT project management, then crossed the fence into the business (doing a…

The fatally flawed FLS

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The first results from the UK's Funding for Lending scheme have been released. As widely predicted, it has been a flop. Of the large banks who signed up for the scheme, only one - Barclays - has increased lending. The others - Royal Bank of Scotland (RBS), Lloyds Banking Group (LBG) and Santander - have all reduced net lending. To be fair to LBG and Santander, they have only done exactly what early in 2012 they said they would do, namely reduce retail lending, particularly mortgages. But that is exactly what the Funding for Lending scheme was supposed to prevent.

The origins of the Funding for Lending scheme lie in the Eurozone crisis. Roll back the clock to mid-2012, and we see a picture of tight credit conditions for customers, particularly higher-risk homebuyers and small businesses. In its first Financial Stability Report in June 2012, the Financial Policy Committee (FPC) attributed the difficult credit conditions to rising funding costs for banks: as banks' funding costs …