Bank Deposits After The Cyprus Crisis
The events in Cyprus shocked bank depositors across Europe and beyond. It was a wakeup call for anyone who still thought of cash as a ‘risk free’ option.
The first meeting between Cyprus and the Troika (the European Commission, European Central Bank and International Monetary Fund) on 15th March proposed to impose a “tax” of 6.75% on bank de-posits up to 100,000 euros (in-creasing to 9.9% for higher amounts).
This immediately raised the question, “but aren’t amounts up to 100,000 euros guaranteed?”.
The European Commission website explains the purpose of these bank deposit guarantee schemes:
Deposit Guarantee Schemes reimburse a limited amount of deposits to depositors whose bank has failed. From the depositors’ point of view, this protects a part of their wealth from bank failures. From a financial stability perspective, this promise prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences.”
The promise is to protect savers in the event of a bank failure. The Cyprus banks had not yet failed, but proposing to deduct a large levy from bank deposits did rather undermine the principle.
There was a public outcry in Cyprus and throughout Europe. The Cyprus parliament voted unanimously against the levy, and many European authorities called for the 100,000 euros insurance to be respected.
Cyprus however still had to raise around 7 billion euros in funds to gets its bailout. Depositors are still being hit, but in the end only bank deposits above 100,000 euros in the country’s two largest banks will be affected. We do not yet know how much above 100,000 euros will be lost (reports indicate between 30% and 40%), but anything below is protected. Capital controls are also now being imposed in Cyprus.
Banking is about confidence and trust, and this has been severely dented. On the positive side, the 100,000 euros insurance held up, even if it took a public backlash and criticism from across the world to get there. Savers now know deposits under the guarantee limit could potentially be “taxed”, but considering the reaction to the original Cyprus proposal it is hard to imagine that this route would be taken.
Speaking to the Financial Times, Jim Leaviss, head of fixed income at M&G, commented: “In some ways it is good that it [the Eurozone deposit guarantee] was tested to destruction, almost failed, but eventually held firm in the face of a collapsing banking system.”
Spain’s Prime Minister, Mariano Rajoy, also said that he is not in favour of people losing their own deposits, because they are in no way responsible for what has happened.
I would however be concerned about holding more than the guarantee limit in a bank account. At the very least you need to be aware that this has a much higher level of risk.
Prior to the final agreement, the Special Adviser to the Organisation for Economic Co-operation and Development (OECD) Secretary-General on Financial Markets, Adrian Blundell-Wignall, warned:
“There are serious problems in bank balance sheets in certain larger EU economies, which may in the end require bank resolutions. It is only natural that the ‘Cyprus approach’ be taken as a pointer for what could be done elsewhere (confis-cation of deposits).”
Since then, even the chairman of the Eurozone, Jeroen Dijsselbloem, has acknowledged that the heavy losses inflicted on depositors in Cyprus could be the template for future banking crises across Europe where banks cannot recapitalise themselves.
The Cyprus debacle, and images of bank clients lined up in front of ATMs, raised the spectre of bank runs again. The problem is that banks do not actually have the reserves if people withdraw their cash en masse.
There is a reason why bank guarantee schemes have a limit. The government or central fund would not be able cover all bank deposits. Deposit guarantees schemes vary from jurisdiction to jurisdiction. Many people who bank in the Isle of Man and Channel Islands do not realise they have a lower level of protection than in the UK and EU. The compensation limit is just £50,000. They also have an overall “cap” on the amount they will pay out over a period. The Isle of Man has no time limit for payment.
Wherever you keep your money, make sure you understand to what extent you are protected in the event of institutional failure. The recent events in Cyprus have shown that we need to consider all the risks to our money, even those not fully appreciated in the past, and take professional advice to ensure our assets are in the best place. No-one can think of bank deposits as a risk free home for their money anymore.
The same advice applies to all investment capital: diversify, diversify, and then diversify some more. Cash is just one asset. You need to spread your savings among different assets, different funds, different sectors etc, possibly even over different managers, to spread the risk. Relying on just one asset is very risky.
Secondly, you should look to ringfence your assets where possible, so that there is a legal separation of your assets from the financial institution holding them. This will protect your money from institutional failure.
Investor protection varies across jurisdictions and products, so for peace of mind seek advice from a wealth management firm like Blevins Franks on what would be the best solution for you.
All advice received from any Blevins Franks firm is personalised and provided in writing; this article should not be construed as providing any taxation and / or investment advice.
All information contained in this article is based on Blevins Franks’ understanding of legislation and taxation practice, in the UK and overseas, at the time of writing; this may change in the future.