But this is a sensible policy

The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.

\”If there is a risk in a bank, our first question should be \’Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?\’,\” he said.

\”If the bank can\’t do it, then we\’ll talk to the shareholders and the bondholders, we\’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.\”

Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

Uninsured deposits are uninsured. That\’s the way it should be.

Sure, we\’ve just created a market in deposit jockeys, as they have in the US. People who parcel out large sums into €100k deposits across a number of banks in a number of countries. Just as FDIC rules lead to people doing that across the US states.

But it does reduce, significantly, the moral hazard of having deposit insurance at all. Don\’t forget, there are no solutions, only trade offs. Deposit insurance for the small guys lowers the risk of bank runs significantly. But we don\’t want to have everyone blissfully aware that the bank is being run by spivs but that\’s OK, the govt will stand behind any losses.

Thus, uninsured deposits are uninsured. Great.

7 thoughts on “But this is a sensible policy”

  1. Interestingly, Cypriot commentators I heard on the radio yesterday were outraged that their nation had been singled out and not given the same facillity as Ireland, Spain et al. It seems to me the Troika might actually have done them a favour. Am I wrong?

  2. Tim: agree completely, but it’s one of those policies that it’s better to wait until the current round of Crisis is over and the Chicken Lickens have stopped panicking.

    Ironman: for ordinary Cypriots, it’s a far better deal than the Irish were shafted with. Rather than bailing out crooks and the idiots who backed them at the expense of a generation of taxpayers (the Irish case), it’s bailed out grannies at the expense of crooks.

  3. Any way you look at it, the FDIC program in the US allows banks like the Bank of America to make huge bets (London Whale) with taxpayer insured funds. They are playing with house money.

    Tim adds: To be honest, I’d take you slightly more seriously on this if you showed the knowledge that the London Whale was part of JP Morgan, not Bank of America.

    Jus’ sayin’

  4. I agree that uninsured deposits are uninsured, but they should only be added to the mix when both shareholders and bondholders have been completely fleeced.

    Tim adds: As I’ve actually been saying…..

  5. Of course uninsured deposits are up for grabs if a bank goes under.
    But these haven’t gone under, they’ve been restructured by force, with assets and liabilities being swapped between two companies. That’s very dirty pool & if you tried it with two limited companies, you be done for fraud.
    As a practical matter, anybody in their right mind will now avoid EZ banks.

  6. They’ve been restructured by force because they were bust. Of course you could do that with limited companies – once they’re in administration (or local equivalent), the administrator’s job is to ensure the creditors are made whole in the obvious order of priority.

    So only gibbering paranoid fuckgibbons will avoid *all* EZ banks.

    Anyone in their right mind would now avoid EZ banks that are bust and were previously relying on the assumption that taxpayers will be screwed over to compensate creditors, which is why Bankia shares fell substantially on the Cyprus news while Deutsche Bank shares didn’t.

Leave a Reply

Your email address will not be published. Required fields are marked *