Tuesday, 26 March 2013

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 Bank of Cyprus UK are therefore safe from confiscation by the Cypriot government, regardless of their size. Deposits in the Bank of Cyprus UK are not frozen and there are no restrictions on withdrawals.

Laiki Bank UK
Unfortunately for UK depositors, Laiki Bank UK is not a separate entity. It is a branch of Laiki Bank (Cyprus). Deposits in Laiki Bank UK are insured under the Cyprus deposit guarantee scheme. Because Cyprus is a member of the European Union, the Cyprus scheme is consistent with the European Union's rules for deposit guarantee schemes. Deposits in Laiki Bank UK are therefore insured up to a limit of 100,000 Euros at the prevailing exchange rate. Any claim for compensation would be made in the first instance against the UK Financial Services Compensation Scheme. It would be the responsibility of the UK Government then to seek reimbursement from the Cyprus scheme.

However, the terms of the winding-up order for Laiki Bank DO apply to deposits in Laiki Bank UK. Deposits of less than 100,000 Euros will be transferred to the Bank of Cyprus (or possibly Bank of Cyprus UK - it is unclear at present) as part of the closure procedures for Laiki Bank. Deposits above that amount are frozen and depositors should expect to lose a substantial proportion of the excess above 100,000 Euros, possibly as much as 100%. No compensation will be available for this loss.

Accounts held by UK depositors in Bank of Cyprus
Deposits of less than 100,000 Euros in Bank of Cyprus will be untouched. Larger deposits are frozen and will eventually be subject to a haircut. The size of the haircut is currently unknown but it is thought likely to be of the order of 40%. Compensation will not be available for this loss.

Accounts held by UK depositors in Laiki Bank (Cyprus)
Deposits of less than 100,000 Euros in Laiki Bank will be transferred in their entirety to the Bank of Cyprus. Larger deposits are frozen: they will in due course be placed in a new state-owned entity and written off in part or in full against Laiki Bank's bad assets. Holders of deposits in excess of 100,000 Euros should expect to lose a large part, up to 100%, of the excess amount (the initial 100,000 Euros is protected). Compensation will not be available for this loss.

Other Cypriot banks, and Cyprus branches and subsidiaries of overseas banks.
No other bank is involved in the bailout at present. Deposits of any size in other Cypriot banks and in Cyprus branches and subsidiaries of overseas banks will be unaffected by the proposed haircut.


Bank opening
Laiki Bank (Cyprus) is now permanently closed and will be wound up. All other banks in Cyprus are closed until Thursday 28th March at the earliest. When they open there will be strict limits on withdrawals, payments and transfers from all Cypriot banks. There will also be limits on the convertibility of Cyprus Euros to other currencies and limits on the amount of money that may be transferred out of the country.

The Bank of Cyprus UK has remained open throughout the crisis. As a UK bank, it has no reason to close. There will be no restrictions on withdrawals, payments or transfers to or from Bank of Cyprus UK except to/from its Cyprus parent and other Cyprus banks.

Laiki Bank UK was open until last Friday, but is now permanently closed and will be wound up with Laiki Bank (Cyprus). It seems likely that Laiki Bank UK was one of the conduits through which money left Cyprus during the extended bank holiday.

Non-Cypriot banks
I'm including information here on the status of Bank of Ireland UK and Santander UK to reassure those who are worried that these may be affected by problems with their parent banks in, respectively, Ireland and Spain. Like Bank of Cyprus UK, Bank of Ireland UK and Santander UK are separately-capitalised subsidiaries of their parents. They are UK-iincorporated banks that are regulated by the FSA, and the UK's Financial Services Compensation Scheme applies to deposits of under £85,000 in these banks as in all other UK-incorporated banks. Were Ireland or Spain to find themselves in a similar situation to Cyprus, these UK subsidiaries would be excluded from any depositor haircut or levy and from forcible winding-up. 

And finally - the UK. Since the Global Financial Crisis, the entire direction of regulation in the UK has been to make banks safer. They are being required to have more capital, more liquid assets, a higher ratio of deposits to loans and generally to reduce balance sheet risks. As the stated aim of the UK government is to reduce or eliminate the need for taxpayer bailout, it is not possible to state that all deposits are 100% safe: only smaller deposits that are subject to Financial Services Compensation Scheme insurance can be regarded as completely safe from loss or confiscation. However, improved capitalisation of UK banks and the presence of convertible bonds in their capital structures make it far less likely that a contribution would be required from large depositors in the case of a UK bank failure than is the case in Cyprus, where banks are poorly capitalised and have few bonds. The recapitalisation of UK banks will continue for some time to come. 




20 comments:

  1. Frances,
    This is a frightening account. One which will reverberate the rest of the week. Thank you for reporting this.

    David

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  2. "When they open there will be strict limits on withdrawals, payments and transfers from all Cypriot banks. There will also be limits on the convertibility of Cyprus Euros to other currencies and limits on the amount of money that may be transferred out of the country."

    Do we know this for sure? Where can we get the details on limit sizes, or is this yet to be hammered out?

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    Replies
    1. They can't even decide when to open the banks. Doubt the details are hammered out

      Delete
  3. In connection with UK banks you say "only smaller deposits that are subject to Financial Services Compensation Scheme insurance can be regarded as completely safe from loss or confiscation."

    I thought that the FSCS only protected deposits in the event that the bank goes bust - in theory it doesn't protect against state confiscation, does it? Wasn't this the argument run to justify the "levy" in the Cypriot case?

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    1. Confiscation of funds via a levy is no more legal in the UK than it is in Cyprus. Parliament would have to pass legislation to enable it to happen. I remind you that the Cyprus Parliament rejected their Government's proposed legislation to allow this. There is no reason to suppose that the UK Parliament would be any more willing to approve a levy on small depositors than the Cypriot parliament. On the contrary, the Treasury Committee is pushing for strengthening of legislative measures to protect depositors. Given that, why on earth would it agree to a levy? Would be the most extraordinary example of doublethink.

      I repeat what I said on BBC Radio 4's Moneybox programme last Saturday: I really think people should stop worrying.

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  4. Can Cypress impose a "tax" in an other country?

    I have been reading cyprusmarket on twitter and various news. It was said that Cyprus banks that were in other countries were open and fully transacting at the beginning of the Cyprus bank "holiday" for about a week. If I remember correctly, London and Russia were mentioned as such.

    Would such things have been in your post said earlier?

    Are you currently employed by part of the banking and finance industry? Or, receiving funds such as retirement from those industries?

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    Replies
    1. Cyprus banks have indeed been open in London throughout the Cyprus bank holiday. For them to close the Cyprus authorities would have needed the agreement of the UK government - certainly for Bank of Cyprus UK, which as I pointed out in the post is a UK bank regulated by the FSA.

      I should put a disclosure on my blog really. I do not work for any part of the financial industry and I receive no income from them in any way.

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  5. Correction 3rd paragraph should have read:

    Could what was said in your post have been said earlier?

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    Replies
    1. I'm fairly appalled that no one has said this before.

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  6. Reporter from London tweeting from ground in Cyprus.

    twitter.com/faisalislam

    Also commenting on, referencing news stories, or doing stand up comedy on twitter is:

    twitter.com/russian_market

    Also carping from London:

    https://twitter.com/Pawelmorski

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  7. So what is the deal? Was it possible to get Laiki #Cyprus money out of Laiki UK last week?

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    Replies
    1. Yes, it was. And I have no doubt that quite a bit was removed.

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    2. Thanks! Some "currency union" this, where banks & consumers are treated differently depending on where they are/live...

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    3. The UK is not a member of the currency union.

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    4. Laiki Bank UK has remained open since the financial crises in Cyprus.

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  8. Please spare a thought of those in Cyprus who will lose their pensions, savings, homes and much more. Politics, irregularities have ruined this lovely island. Shame on those who are responsible.

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  9. The new big trick of neoliberal bankdebtocracy :

    http://failedevolution.blogspot.gr/2013/03/the-new-big-trick-of-neoliberal.html

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  10. On the one hand, there's the UK, on the other, you have the Russians, who aren't too thrilled with this mini heart attack. I'm personally more amused by Nicos' attempt to shift blame (http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=I3UGF4W29OE&preview=article&linkid=90ab996c-7773-4c28-a25f-7034ecf3fb51&pdaffid=ZVFwBG5jk4Kvl9OaBJc5%2bg%3d%3d) away from the institution obviously responsible: the bank's floundering policy. Oh world, when will you cease to amuse?

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  11. Cyprus is having trouble with their banks now so their economy is having trouble. I wish they can be helped by other countries.

    too big to fail

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  12. Thanks to share deposits information of Cyprus bank. Its a great article. I like it...
    Estate Agents in North Cyprus

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