Coppola Comment

The final deal agreed to restructure the Bank of Cyprus involves the bail-in of senior bond holders and large depositors (over 100,000 Euros). What this means is that in return for the seizure of some of their money, bond holders and depositors will be provided with shares in the resolved banks. They will become part-owners of the bank. From the point of view of small depositors, this looks rather good. It ensures that their deposits are protected not only now, but in the future. I pointed out in a previous post that small deposits are only protected to the extent that their sovereign can afford them (or to the limit of the amount that can be raised from other banks): but if large deposits and senior bonds can be bailed-in, deposit insurance should always  be affordable - shouldn't it? That is, of course, assuming there are any. I shall return to that shortly. The Bank of England's Financial Policy Committee has recommended recently that banks should have more capital. Co...

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 hap...

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 ...

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 pa...

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 hair...

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 ...