Panicos Demetriades, the governor of the central bank of Cyprus, pressed for “urgent” legislation “relating to the reorganisation and recovery of the Cypriot banking system” in a crisis that threatened to spark a run on banks and to wipe out £1.7bn in savings held by Britons.
“This consolidation process will prevent the risk of bank failures and protect in their entirety all insured deposits up to the amount of €100,000 euros,” he said.
“It also creates conditions for the recovery of the banking system and guarantees jobs.”
Cyprus will divide Laiki into two entities, one will contain all insured deposits of under €100,000 and the other will be a “bad bank” with larger deposits, often Russian, subject to an asset recovery programme and substantial losses.
Apparently a 40% haircut. A bank goes tits up then the losses go, shareholders, junior debt, then senior debt and deposits. Them\’s just the rules.
And one great joy of their actually doing this will be that it substantially reduces the moral hazard of having that deposit insurance in the first place.
Sorry cheloviki, but uninsured deposits are uninsured deposits.
Actually, Tim there’s a problem. Technically the losses go to all depositors and THEN the deposit insurance scheme bails out the depositors sub-100,000. Under the scheme as described, the deposit insurance scheme/government avoids contributions and piles them on to the 100,000+ depositors.
For once, the name of the central banker is an omen. Panicos tries to manage los panicos.
Essentially the insured losses here are so large that the insurer can’t pay. Which is why I am not quite with Tim on the post-hoc changing of the rules to haircut smaller deposits as well as bigger ones. When you can’t enforce the law then, well, you can’t enforce the law.
Who pays the deposit insurance? Supposedly it’s the Cypriot government, but I guess they are having trouble coming up with the money right now. So the deposit guarantee is useless – Cyprus has no banks, reverts to a barter economy, stone-age conditions break out.
The alternative is the bigger depositors pay it and, as Tim has said elsewhere we achieve the primary objective of still having a functional banking system. At actually lower cost to the depositors than if you took the alternative route – which would wipe out all those deposits anyway.
The corollary of which is, all (government-backed) deposit insurance schemes are themselves scams. They only work when small banks die, not when all the big banks in a country die. The only entity that can provide functional deposit insurance for calamitous circumstances is the ECB, with its unlimited money-printing facility. Cue moral hazard. But as we know the first law of economics is there are no solutions, only trade-offs.
cheloviki
Hmm. I don’t think there is a plural of chelovek, the word you’d use is lyudi. “Cheloveki” exists as a word, but I think it is the genitive of “chelovek”.
Russian depositers, eh?
Then I trust Mr Demetriades has also given thought to the state of his life insurance.
Pity the same doesn’t apply to the banks here in the UK!
If you have over 100k and you don’t find out whether you bank is a good place to keep your money, you deserve to loose some of it.
But in our nanny state, with schools banning conkers, risk-taking is something frowned upon.
Tim N, I think человеки is used in the plural of some compound nouns, e.g. снежный человек (yeti) becomes снежные человеки. Which is not to disagree with your advice to Tim W, just a curious observation.
@PaulB & Tim N
Cheloviki, or, how you say, человеки, she is Russian for “bad bank
Bugger.