The Cyprus Bank Bailout : They're Reneging On Government Deposit Insurance

[sailingaway]

http://www.forbes.com/sites/timworstall/2013/03/16/the-cyprus-bank-bailout-could-be-a-disastrous-precedent-theyre-reneging-on-government-deposit-insurance/


There’s a little detail in the just announced bailout of the Cypriot banks (and Cypriot economy as a whole) that could be setting an entirely disastrous precedent for the entire European banking system. Please note the “could be” here, it depends upon how people react next.

That Cyprus and its banks need bailing out is beyond doubt. The banking sector is absolutely vast as compared to the size of the economy (largely as a result of a couple of decades of use as a secure location for Russian deposits) and the banks are indeed bust. Largely because they were heavily invested in Greek Government bonds which then, as we all know, suffered two substantial haircuts.

So, something needed to be done. And something has been done. More money is being sent in to recapitalise the banks, Cypriot loans are being rescheduled, the government will sell off assets to help plug the gap and so on. However, there is this one further detail that could have seriously bad effects:


Euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros — the ceiling for European Union account insurance — and 9.9 percent above that.

There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.

However, there’s a very great difference between allowing depositors without government insurance to take losses and actually reneging on the previously promised government insurance. And it’s that second that they’re actually doing here. Here’s the description of the Cypriot government deposit insurance scheme:


Participation in the DPS is compulsory for all banks authorised by the Central Bank of Cyprus, i.e. banks incorporated in the Republic of Cyprus, including their branches in other countries, and the Cyprus branches of foreign banks, incorporated outside the Republic of Cyprus or the Member-States of the European Union. The DPS does not cover deposits of branches of banks established in European Union Member States. These deposits are covered by the corresponding deposit protection scheme established in the country of incorporation.

The DPS is activated in the event a decision is reached that a member bank is unable to repay its deposits, or as a result of a Court’s order for the winding-up of a member bank. Where a bank is unable to pay its deposits, the relevant decision is adopted by the Central Bank of Cyprus or, where a member bank is incorporated in a country outside the Republic of Cyprus, by the competent supervisory authority of the country of incorporation.

The maximum level of compensation, per depositor, per bank, is €100.000.

Note that last number. Under the system until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn and governmental promise has been shown to be false. And not even the European Union nor the European Central Bank are going to make them stick to it. Indeed, very much the other way around. The EU and ECB are insisting that the Cyprus authorities breach this deposit insurance provision.

As I say, there’s nothing wrong with making uninsured depositors take some of the pain. Certainly nothing at all wrong with making those with large deposits take a haircut. The problem is when government has said “we’ll insure this” and when push comes to shove they say “err, no, we won’t”. And the problem with this is that it makes all future EU deposit insurance worth that much less.

Think through why we have deposit insurance? Banks, simply because of fractional reserve lending, are vulnerable to bank runs. If all the depositors turn up at the same time looking for their money back they cannot have it: it’s out in the loans to businesses and mortgages to consumers. This is a known fragility of the system. The only possible solutions are either to have full reserve banking (a bad idea for other reasons) or to have deposit insurance. In that insurance the government stops bank runs stone dead. By promising that depositors (up to some level) cannot lose money. Thus a run does not form and become self-fulfilling.

The point isn’t to make the depositors whole: it’s to stop a bank run forming in the first place. But, what if the government then reneges on a promise to insure depositors? Then the insurance isn’t going to stop bank runs, is it?

more at link: http://www.forbes.com/sites/timworstall/2013/03/16/the-cyprus-bank-bailout-could-be-a-disastrous-precedent-theyre-reneging-on-government-deposit-insurance/

[Christian Liberty]

Its not government's job to insure anyone's deposits at our expense. That promise should be broken. They had no right to "Tax" deposits like they did though... Why did they do this again?

[CaptUSA]

Why did they do this again?When Willie Sutton was asked the question on why he robbed banks, he reportedly said, "Because that's where the money is." I suspect you'd get the same answer if they could be honest.

[Christian Liberty]

Yeah, true. What's their EXCUSE?

[Danan]

Its not government's job to insure anyone's deposits at our expense. That promise should be broken. They had no right to "Tax" deposits like they did though...

I completely agree with you. Nobody has a right to be insured by the government with other people's money, no matter what the law says. The one good outcome of this story is that public deposit insurance is shown to be the fraud it always has been. So I don't really understand the premise of that article.

Deposit insurance (at least the public version) has to go. It's one of the most harmful policies in the financial sector. And maybe one of the most harmful in general.

I also disagree with the tax, though. Or any other meddling in the banking sector for that matter. If the banks would have gone bankrupt, depositors should have lost all their money. If not, you should have lost none of your deposits. Whoever loses how much money is not the EU's decision to make. Fucking megalomaniacs.

[Christian Liberty]

I think you could make the case that this kind of fractional-reserve banking is fraud anyway. At bare mininum you should have to agree that you, not the taxpayers, suffer the losses when it fails.

[ghengis86]

They basically stole up to 10% of depositor's private wealth. The EU leaders forced this on Cyprus. Parliament must vote on it, but it looks like anywhere from 3-13% of depositor cash will be stolen.

Fuck these tyrants. A d it can and will happen here. It already is with QE and monetary inflation.

[MRK]

The reality here is that you can prevent yourself from having this happen to you. We all know how to do it now, and the deposit insurance promise is now empty. Banks simply are not secure places to hold wealth. Convenient perhaps, but certainly not secure.

[itshappening]

dont leave money in your bank accounts and don't say you weren't warned.

This will happen in the USA in due course.

There were always bank runs in the old days... the concept doesn't just disappear because the Federal Reserve has a printing press and Ben Bernanke says so. There will be major bank failures and collapse of the fiat system so prepare yourself.

[moostraks]

It is more than convenient. They have set things up so it is very difficult to exist without an account. Furthermore, to pay with cash is portrayed as how a terrorist operates. Free checking just left my bank unless you keep over 2 grand in there. This rots...

[tangent4ronpaul]

And full reserve banking is bad why?

-t

[Athan]

Its not government's job to insure anyone's deposits at our expense. That promise should be broken. They had no right to "Tax" deposits like they did though... Why did they do this again?

Pick one:
Socialism
Keynsianism
Fiat Currency
Fractional Reserve Banking
Central Banking
Corporatism
Statism

[Athan]

And full reserve banking is bad why?

-t

Not bad, just not considered profitable enough by bankers. You get a local banker to do full reserve banking and he needs to be happy with the revenue through interest and fees.

[sailingaway]

I completely agree with you. Nobody has a right to be insured by the government with other people's money, no matter what the law says. The one good outcome of this story is that public deposit insurance is shown to be the fraud it always has been. So I don't really understand the premise of that article.

Deposit insurance (at least the public version) has to go. It's one of the most harmful policies in the financial sector. And maybe one of the most harmful in general.

I also disagree with the tax, though. Or any other meddling in the banking sector for that matter. If the banks would have gone bankrupt, depositors should have lost all their money. If not, you should have lost none of your deposits. Whoever loses how much money is not the EU's decision to make. Fucking megalomaniacs.

The premise of the article is that deposit insurance prevents bank runs because people believe in it and this shows it is a sham when the chips are down, which is, of course, when it is really needed.

[Anti Federalist]

The premise of the article is that deposit insurance prevents bank runs because people believe in it and this shows it is a sham when the chips are down, which is, of course, when it is really needed.

I always wondered, and never got a good answer as to where the hell PMI was during the housing collapse.

[Anti Federalist]

There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.

Fuck that.

You miserable bastards set up a system where I have no choice but to use your rotten, corrupt institutions, and then somehow blame me, because I did not exercise some sort of "due diligence" when I set my accounts?

[HOLLYWOOD]

Yes you defined Paul Krugman...

We know this game... Due Process & Rule of Law ONLY counts when it benefits the state. Corrupt & authoritarian state ruled by the elitists, peddled debt, issued by their propaganda mouthpieces like Krugman.

BTW, Since Krugman is sucking Troika bone with Cyprian articles. Here: http://www.policymic.com/articles/10222/cyprus-bailout-shows-why-paul-krugman-is-wrong-about-europe

Pick one:
Socialism
Keynsianism
Fiat Currency
Fractional Reserve Banking
Central Banking
Corporatism
Statism

[ghengis86]

I always wondered, and never got a good answer as to where the hell PMI was during the housing collapse.

I always wondered about that too; why didn't PMI payout when it was supposed to? I figured that the PMI premiums were used to fund derivatives (AIG) and when things blew up, there's was nothing left to payout claims.

Anyhow, does it really matter anymore? They are thriving fucking counts who will fuck over mundanes early and often. Can it get any clearer?!?!?

[BAllen]

Use the system to your advantage. With fsb, credit is easier. Open multiple bank accounts. If you overdraw and they charge exorbitant fees, ask for a loan to pay it off. If they refuse, don't pay them. Use your other bank accounts. Run up a cc bill, and hit tough times? Don't pay them. You'll get offers for other credit cards. Take them. Use them like cheap whores, and cast them aside when you no longer need them.

[itshappening]

They've shut down the banks until Thursday lol...

Could be longer and cause more chaos while they figure out what to do ..

Either way, the money is gone. The insiders will make sure the Russians get their billions while the "people" are denied whatever is in their account... unless the ECB/IMF ride to the rescue which I suspect they will.

It does take time to print the billions and ship it over though. They're not used to this and everything is just on computer nowadays. They will need to satisfy the demand for actual money and bank notes.

[itshappening]

Yes people need to understand FDIC is a scam and they cannot possibly stand behind a failed bank.

The money just isnt there. They've loaned it all out and FDIC doesn't have hundreds of billions on hand to make good on any promises they make.

This is a lesson to us all and before it happens to OUR bank.

Don't keep thousands lying around. Make sure you convert SOMETHING to gold/silver/dimes/bitcoin/whatever because they will loot you blind when the collapse comes and will deny you access to the bank when everyone turns up demanding their deposits and they only have 3% on hand.

A timely and worthwhile lesson.... Take note!

[BAllen]

Yes people need to understand FDIC is a scam and they cannot possibly stand behind a failed bank.

The money just isnt there. They've loaned it all out and FDIC doesn't have hundreds of billions on hand to make good on any promises they make.

This is a lesson to us all and before it happens to OUR bank.

Don't keep thousands lying around. Make sure you convert SOMETHING to gold/silver/dimes/bitcoin/whatever because they will loot you blind when the collapse comes and will deny you access to the bank when everyone turns up demanding their deposits and they only have 3% on hand.

A timely and worthwhile lesson.... Take note!

(shrug) The government will simply confiscate your gold.

[georgiaboy]

Insurance -- one of my least favorite words now. Not sure what's worse, insurance or banks. Same coin, different sides.

[angelatc]

I completely agree with you. Nobody has a right to be insured by the government with other people's money, no matter what the law says. The one good outcome of this story is that public deposit insurance is shown to be the fraud it always has been. So I don't really understand the premise of that article.
.

The point that I got from the article is that people with less than 100,000 euros in their accounts should be immune from the bank's failure, and therefore shouldn't be lose anything, even if the bank fails. The tax on them is undermining the so-called insured amount.

On the other hand , people with more than 100,000 euros in their accounts stand to lose everything over that amount if the bank fails. So if their choice was to lose 100% of that excess amount, or some smaller percentage while the bank stays afloat, which should they choose?

Of course, this isn't a free market solution. because the choice is the same no matter which bank these people have money in. If the bankers cabal didn't control all the banks, only the people in the banks that made bad decisions would be in trouble. And the troubled banks would fail, because the option of only taking a little money from each investor to save said bank wouldn't exist, because presumably no sane person would leave their money there after having their account raided once.

[sailingaway]

The point that I got from the article is that people with less than 100,000 euros in their accounts should be immune from the bank's failure, and therefore shouldn't be lose anything, even if the bank fails. The tax on them is undermining the so-called insured amount.

On the other hand , people with more than 100,000 euros in their accounts stand to lose everything over that amount if the bank fails. So if their choice was to lose 100% of that excess amount, or some smaller percentage while the bank stays afloat, which should they choose?

Of course, this isn't a free market solution. because the choice is the same no matter which bank these people have money in. If the bankers cabal didn't control all the banks, only the people in the banks that made bad decisions would be in trouble. And the troubled banks would fail, because the option of only taking a little money from each investor to save said bank wouldn't exist, because presumably no sane person would leave their money there after having their account raided once.

but they knew the rules and could put 100K in a bunch of different banks under the insurance. The point is that is the same thing that prevents bank runs in other countries and if the IMF and governments can ignore it, it won't have that effect.

[kathy88]

There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.

Wait, wut?

[angelatc]

I always wondered about that too; why didn't PMI payout when it was supposed to? I figured that the PMI premiums were used to fund derivatives (AIG) and when things blew up, there's was nothing left to payout claims.

Anyhow, does it really matter anymore? They are thriving fucking counts who will fuck over mundanes early and often. Can it get any clearer?!?!?

PMI didn't cover the homeowner, nor does it cover the entire value of the home. It only covers the lender for the portion of the loan that exceeded 80% of the value of the property. So if you bought a $100,000 house, putting $10,000 down with a $90,000 mortgage, the value of the PMI was $10,000.

That's why you can drop PMI after paying for a few years, and also why traditional mortgages where 20% down is a requirement didn't require PMI.

Early on, there was some noise about the banks fast-tracking foreclosures so they could collect that PMI check, but I can't seem to find a story about that now.

[torchbearer]

Wait, wut? Schiff said the same thing, in a free market- the possibility of losing your deposit would be the hazard that keep people and their banks from investing in risky stuff. having a government provided safety net for deposits creates a moral hazard. thus, once these people get ass-raped, their butthurt will remind them that the only bank they can trust is the piggy one in their closet.

[sailingaway]

Schiff said the same thing, in a free market- the possibility of losing your deposit would be the hazard that keep people and their banks from investing in risky stuff. having a government provided safety net for deposits creates a moral hazard. thus, once these people get ass-raped, their butthurt will remind them that the only bank they can trust is the piggy one in their closet.

Which is where the bank runs come in, and is why they are keeping banks closed until Thursday while they decide if they are really going through with it.

[itshappening]

(shrug) The government will simply confiscate your gold.

COME AND TAKE IT

[HOLLYWOOD]

Cody pretty much sums it up in his first sentence.

Market Watch: The Cody Word (http://blogs.marketwatch.com/cody)
http://blogs.marketwatch.com/cody/2013/03/18/everything-you-need-to-know-about-banking-bailouts-and-cyprus/

Everything you need to know about banking, bailouts, and Cyprus
March 18, 2013, 2:04 PM

Good morning and welcome back to the land of anarchy (http://www.marketwatch.com/story/cyprus-at-epicenter-of-new-euro-zone-crisis-2013-03-18) where contracts and guarantees don’t mean anything anymore.

Over the weekend, as I’m sure you’ve already heard (http://wallstreetallstars.com/monday-morning-musings-49/), Cyprus and the EU and the IMF (and the U.S. Treasury which is part of the official decision-making body at the IMF) all decided that it was in society’s best interests to confiscate the money in people’s checking and savings accounts (http://blogs.marketwatch.com/thetell/2013/03/18/cyprus-deposit-levy-shakes-up-markets/http://blogs.marketwatch.com/thetell/2013/03/18/cyprus-deposit-levy-shakes-up-markets/). Not all of it, at least not yet.
But as there’s a ton of confusion and misdirection about what this latest round of theft of private capital and descent into anarchy really is, let’s walk through how this works in real terms.
Picture a giant bank which gets billions in covert and overt subsidies and bailouts every year. Because the banking sector and its giant corporate offshoots have blown themselves up and needed repeat bailouts and ever more subsidies to stay in business, the government now “guarantees” that your customers’ savings and checking deposits will always be there when they need them. The banks supposedly keep all those “deposits” completely separate from any trading, securitizing, Treasury-buying and bonuses paid out every year.

I’m actually talking about the banking sector in Cyprus and in every country in the EU, but the very same principles and concepts and lack of rule-of-law applies here in the U.S. with our Too-Big-Too-Fail banks (http://www.marketwatch.com/story/breaking-up-too-big-to-fail-banks-is-too-simple-2013-03-18) and the FDIC insurance “guarantee” that you think you’ve got for your savings and checking accounts up to $200,000.
But every major bank in the world, courtesy of the housing bubble collapse in the U.S. in 2006-2008, literally has billions upon billions of dollars of losses from bad loans, bad securitized investments, bad trading and from bonus payouts for the people who generated all those losses.
So the government and the regulators are supposed to enforce the law which would mean making sure all the people who risked their money for an ownership stake in these banks should lose everything. The bondholders would lose most or all of the money they risked lending the bank money. And the people who saved their money and deposited in the bank’s vaults with the understanding that they were guaranteed to get every dime back would indeed see that lawful guarantee followed out.
But what has happened instead for the last five years is something else entirely and with this Cyprus “tax” development over the weekend, it has been taken to a new explicit level of wealth confiscation.

This time in Cyprus, what they’ve proposed to do to help the banks and the government there continue to pretend they aren’t completely bankrupt already, is to take 7% of the money out of everybody’s checking and savings accounts if they have managed to save less than about $100,000. If they’ve saved more than that, the government and the banks will take about 10% of your money and wire into the banks’ own accounts and allow the bank to continue to pay interest to its lenders, pay dividends to its shareholders, and pay bonuses to its incompetent executives.
Everybody who saved their money for the future has to pay. Everybody in the country who hasn’t saved any money in a bank, gets to keep all their wealth. Sounds familiar, doesn’t it?

You see, for the last five years, the U.S. and EU governments have been stealing trillions of dollars of taxpayer funds for the banking system as follows:



0% Interest rates (ZIRP) — The governments lend the banks money at 0% interest and then borrow it back from the banks at 2%-3% or even in the EU’s case, 10% plus. It’s riskless profits for the banks and it costs the taxpayers trillions every year.
TARP and other direct bailouts — The governments have literally written dozens of trillion dollar welfare checks for the banks shareholders to distribute in dividends and bonuses since 2008.
Implicit TBTF guarantee — Recent studies show that the TBTF banks save 10s of billions of dollars in interest costs every year because the marketplace (their lenders) knows that the governments will bail them out if the bank runs into any major problems.
The banks pay out less than 1% interest on deposits while charging up to 30%-plus for interest on loans.
MF Global and its TBTF trading partners stole billions of dollars directly from the accounts of farmers and ranchers to gamble on EU-debt derivatives and lost. And nobody went to jail.
Banks are paying you .25% on the money in your checking account while inflation of 5% plus (or whatever the real inflation rate really is) makes every one of those dollars worth less on a daily basis.
Fannie Mae and Freddie Mac get saddled with trillions in losses as the banks cherry pick the securities they buy and sell these taxpayer-funded entities.
The banks get to sell trillions of dollars of worthless mortgage and government debt securities to the Federal Reserve at full value through the magic of Quantitative Easing.
The banks got the regulators and accounting boards to allow them to mark most of their assets to whatever value they think they should be worth whenever they need them to be worth it.


There’s more of course. But you get the idea. The biggest issue with the Cyprus development is that apparently the financial sector and the governments it supports and which support it are so short of actual capital, that they are resorting to something that everybody can so clearly see is a confiscation of private wealth.

I see a lot of passionate debates about whether this Cyprus wealth theft is a big deal. Cyprus is a tiny economy (Apple does more sales in two months than Cyprus’ entire annual GDP) and its economy isn’t the issue here. It’s the breach of trust in the system that the rulers and bankers are poking so obviously that is really the issue. The entire banking system is a giant confidence game at this point and that is a perilous thing.

I’m sticking with my high-cash/well-hedged/lots-of-financial-sector-short positioning for now. If you’d like to see exactly how I’m trading this set up, sign up at TradingWithCody.com (http://tradingwithcody.com/). As for the long side, I don’t like the pitches I’m seeing there just yet. I think there sure could be more panic to come in the next couple weeks at least.


Cody Willard writes Revolution Investing (http://www.marketwatch.com/premium-newsletters/revolution-investing?link=djmc_freearticle_RVIblog) for MarketWatch and posts the trades from his personal account at TradingWithCody.com (http://tradingwithcody.com/), which is not affiliated with MarketWatch. At time of publication, Cody was net long physical gold and net short JPM, GS, MS. Follow Cody on Twitter at twitter.com/codywillard (http://twitter.com/codywillard).