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.