Chaos in Cyprus Banks, Problems for New Zealand Depositors
Chaos in Cyprus Banks, Problems for New Zealand
by Charles Drace
"Have you ever seen such an exhibition of incompetence as the EU has displayed in the Cyprus crisis of the last 10 days?" Analyst Martin Hutchinson, March 28, 2013
Ever since laws and deposit insurance schemes were put in place in the aftermath of the 1930's bank failures to protect depositors, almost everyone has assumed that bank deposits were the safest investments after government guaranteed bonds.
This is no longer the case. The lessons of the recent Cyprus example should not be forgotten.
In Cyprus in late March 40% of deposits over 100,000 euros were taken from depositors to bail out Cyprus's biggest bank as well as large EU banks who lent money to Cyprus banks. Various senior EU people involved with this programme have admitted that the Cyprus example is a 'template' for other countries.
The new term 'bail-in' has been coined to describe a bail-out that comes not from governments or the IMF but from depositors money.
"This approach [taking deposits] will be part of the European liquidation policy" Klass Knot, EU Council, March 28, 2013
"You need to be able to do the bail-in as well with deposits." Gunnar Hokmark, EU Parliament, March 29, 2013
"But in the Commission's proposal, which is under discussion, it is not excluded that deposits over 100,000 euros could be instruments eligible for bail- in." Spokesperson for EU Commissioner for Financial Regulation, March 26, 2013
Cyprus will not be an isolated case. According to an IT specialist at the Reserve Bank of New Zealand and the major law firm Buddle Findlay, our banks were instructed years ago to put systems in place for bail-ins from New Zealand depositors. Legislation is now in front of Parliament to facilitate this and could be in place as early as June. My understanding of the New Zealand legislation is that the cut-off point under which depositors will be protected can be changed at will and could be as low as $5,000.
The Bank of England and the US's Federal Deposit Insurance Corporation published a paper in December 2012 which described the bail-in programmes for the US and England.
Spain has already established such a programme.
As we can see from the comments above the EU is almost ready with an EU wide programme. Canada is also writing a bail-in programme.
I haven't heard anything about Australia but they will need to be doing something as their deposit protection scheme is not a funded insurance programme but is the direct liability of the Australian government.
After the bank failures in the US during the early Depression, the Glass-Steagall Act was passed to separate commercial banks from trading/investment banks. This Act was repealed in 1999. Similar laws were put in place in other countries but by the early 1990's they were ignored virtually worldwide by the big investment banks which have been using deposits in their commercial banks to fund futures trading by their investment banks, leading to the financial crises of 2000 and 2008.
The amount of derivative trading by investment banks is now estimated [no record is required to be kept] to be measured in quadrillions and the leverage is much higher than it was in 2008. Thus these big banks are in big trouble and the only solution is for them to go bankrupt or to save themselves by taking depositors money.
The governments of the US, EU and New Zealand have decided it is more important to save the big trading banks than it is to protect depositors money.
A recent report from the major law firm Buddle Findlay asks why the New Zealand government is the only country in the OECD that doesn't have a deposit insurance scheme?
All this poses big risks for individual and company depositors. Depositors in Cyprus are restricted to small daily withdrawals; their money is effectively frozen. All companies must pay for resources and purchases in small amounts of cash. The ports have come to a standstill and hundreds of companies are going out of business every day. Depositors can withdraw enough each day to pay for food and daily expenses but not enough to buy a TV, refrigerator, school tuitions or other bigger ticket item putting all businesses associated with items costing more than 300 euros out of business.
Money is already flowing out of Spanish and Italian banks as fear of the Cyprus Template being imposed on other countries rises.
As fund managers, we are not concerned about our funds because we can always buy government bonds virtually anywhere in the world instead of holding cash and we have access to non-New Zealand and non-EU bank accounts plus we hold gold which is the only real safe haven. But I have not found any way to protect my personal and company bank deposits.
I'm getting many advisories every day to hold on to gold at all costs and to buy more whenever possible and to hold it outside the banking system.