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.
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.
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.