Skip to main content

Deposits in Cyprus

It has become accepted policy that when banks collapse, depositors should not bear any losses. However, in the case of Cyprus, it appears that, as part of the country's bailout by the EU and IMF, depositors are being asked to take a haircut in the form of a levy on savings. This levy has just been rejected by the Cypriot parliament - story here.  The wider fear in the EU is that once the principle of depositor levies has been accepted, it makes banks in other weak economies susceptible to runs because depositors no longer believe that their deposits are 100% secure.

One reason why the levy has been proposed is that the EU is reluctant to bail out the foreign depositors of Cypriot banks.  It is reckoned that up to one half of deposits in Cypriot bank accounts are from Russia. According to a report in Der Speigel, a euro-zone bailout of Cypriot banks would mainly benefit Russian oligarchs, business-people, and gangsters (click here). Bailing out banks is a bad idea and simply increases risk taking and the probability of requiring a bailout in the first place. Depositors either need to be willing to take losses or require bank owners to be willing to provide funds in the case of a bank being unable to repay its depositors in full.

Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.