{"id":7048,"date":"2013-03-18T21:52:56","date_gmt":"2013-03-19T01:52:56","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=7048"},"modified":"2013-03-18T21:52:56","modified_gmt":"2013-03-19T01:52:56","slug":"cyprus-deposit-insurance-and-moral-hazard","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2013\/03\/18\/cyprus-deposit-insurance-and-moral-hazard\/","title":{"rendered":"Cyprus: Deposit insurance and moral hazard"},"content":{"rendered":"

The outcry over Cyprus levy on depositors in defaulting banks raises the question: Why were depositors not more wary of where they deposited their funds? Not all banks are created equal. The reason is deposit insurance for deposits under \u20ac100,000 implied that the government would stand behind its banks and rescue depositors should the banks ever default. The problem is that no one considered the possibility that all the banks would suffer losses sufficient that the government would be forced to default on both its explicit and implied obligations.<\/p>\n

Some time ago<\/a> I wrote about the moral hazard of deposit insurance:<\/p>\n

\n

Deposit Insurance: When too much of a good idea becomes a bad idea<\/h3>\n

Deposit insurance was introduced in the 1930s and saved the US banking system from extinction. Administered by the FDIC, and funded by a levy on all banking institutions, deposit insurance, however, encourages moral hazard. Depositors need not concern themselves with the solvency of the bank where they deposit their funds so long as deposits are FDIC insured. High-risk institutions are able to compete for deposits on an equal footing with well-run, low-risk competitors. This inevitably leads to higher failure rates, as in the Savings & Loan crisis of the 1980s.<\/p>\n

The FDIC does a good job of policing deposit-takers, but no regulator can substitute for market forces. Deposit insurance is critical during times of crisis, but should be scaled back when the crisis has passed. Either limit insured deposits to say $20,000 or only insure deposits to say 90% of value, where the depositor takes the first loss of 10%. That should be sufficient to keep depositors mindful as to where they bank. And restore the competitive advantage to well-run institutions.<\/p><\/blockquote>\n

Requiring depositors to take the first loss of 10 percent should be standard practice for deposit insurance. The same should hold true for bank creditors. But we need to distinguish between insolvency — where liabilities exceed assets — and a liquidity event where the central bank is only called on to provide temporary respite. If the bank is rescued from insolvency by the regulator, bond holders should be required to take an equivalent haircut — painful yet not life-threatening. No one is entitled to a free ride. And bank shareholders, if a there is a bail-out, should lose everything — similar to the Swedish approach<\/a> in the 1990s.<\/p>\n","protected":false},"excerpt":{"rendered":"

The outcry over Cyprus levy on depositors in defaulting banks raises the question: Why were depositors not more wary of where they deposited their funds? Not all banks are created equal. The reason is deposit insurance for deposits under \u20ac100,000 implied that the government would stand behind its banks and rescue depositors should the banks … <\/p>\n

Continue reading “Cyprus: Deposit insurance and moral hazard”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,33,34],"tags":[383,475,1001,1002,3043,3106,3311],"class_list":["post-7048","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-uk-europe-countries-regions","category-us-canada-countries-regions","tag-bankshaircuts","tag-bondholders","tag-deposit-insurance","tag-depositors","tag-savings-loan-crisis","tag-shareholders","tag-sweden"],"yoast_head":"\nCyprus: Deposit insurance and moral hazard - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cyprus: Deposit insurance and moral hazard - the patient investor\" \/>\n<meta property=\"og:description\" content=\"The outcry over Cyprus levy on depositors in defaulting banks raises the question: Why were depositors not more wary of where they deposited their funds? 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They are thinly capitalised asset managers that make a promise \u2013 to return depositors\u2019 money on demand and at par \u2013 that cannot always be kept without the\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7047,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/03\/18\/cyprus-deposit-levy-no-panic-yet-but-scary-long-term-consequences-forbes\/","url_meta":{"origin":7048,"position":1},"title":"Cyprus Deposit Levy: No Panic Yet But Scary Long-Term Consequences – Forbes","author":"Colin Twiggs","date":"March 18, 2013","format":false,"excerpt":"Karl Whelan, Professor of Economics at University College, Dublin reminds us: ....the fact that we don\u2019t see lines at ATMs in Spain and Italy doesn\u2019t mean there isn\u2019t a bank run going on. The Northern Rock episode was a complete anomaly. Modern bank runs stem from people pushing buttons to\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7374,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/03\/30\/when-you-werent-looking-democrat-bank-stooges-launch-bills-to-permit-bailouts-deregulate-derivatives-naked-capitalism\/","url_meta":{"origin":7048,"position":2},"title":"When You Weren\u2019t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives \u00ab naked capitalism","author":"ColinTwiggs","date":"March 30, 2013","format":false,"excerpt":"Yves Smith reports on attempts to undermine the Volcker Rule and why the rule is so important: In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":41219,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/03\/12\/svb-update\/","url_meta":{"origin":7048,"position":3},"title":"SVB update","author":"Colin Twiggs","date":"March 12, 2023","format":false,"excerpt":"SVB Financial Group (SIVB) reported Thursday that it needed to raise $2.5 billion to cover losses on security investments. Its subsidiary, Silicon Valley Bank was closed Friday, with regulators appointing the FDIC as administrator. Total liabilities of the group are $195 billion, according to its last report, including $173 billion\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":41297,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/03\/18\/gold-breaks-out-as-move-hits-180\/","url_meta":{"origin":7048,"position":4},"title":"Gold breaks out as MOVE hits 180","author":"Colin Twiggs","date":"March 18, 2023","format":false,"excerpt":"The MOVE index climbed to 180 on Friday. The MOVE measures short-term interest rate volatility in bond markets. Levels above 150 warn that the Fed is losing control of interest rates and will be forced to intervene. The bank run continues. Large depositors are moving out of bank deposits and\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"MOVE Index","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-17-move.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-17-move.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-17-move.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":9675,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/04\/13\/disturbing-trends-with-financial-crises\/","url_meta":{"origin":7048,"position":5},"title":"Disturbing trends with financial crises","author":"ColinTwiggs","date":"April 13, 2014","format":false,"excerpt":"From the Economist: Five devastating slumps\u2014starting with America\u2019s first crash, in 1792, and ending with the world\u2019s biggest, in 1929\u2014highlight two big trends in financial evolution. The first is that institutions that enhance people\u2019s economic lives, such as central banks, deposit insurance and stock exchanges, are not the products of\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/7048","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=7048"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/7048\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=7048"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=7048"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=7048"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}