March 29, 2013

The Silver Lining in Cyprus Banking Crisis

The silver lining in Cyprus banking crisis.
First, Jacob Funk Kirkegaard gives the reasons for Cyprus crisis – 
In a strategy reminiscent of the infamous IceSave scheme by Icelandic banks in the United Kingdom and the Netherlands, Cyprus’s banks offered low tax rates and generous deposit rates—4.5 percent annually vs. maybe 2 to 2.5 percent elsewhere in the euro area—to an increasingly big non-resident depositor base, from Russia especially.
Needless to say, paying depositors that much is costly. To offset those costs, the Cypriot banks had to make equally high yielding loans to the Cypriot domestic economy as well as to high yielding (and high risk) assets. Such assets dried up when interest rates fell across the advanced economies following the global financial crisis. Beyond Cyprus’s ties to Greece, it was thus not a coincidence that Cypriot banks remained so heavily invested in high yielding Greek government bonds in 2009–10 just as Greece plunged into crisis. The Cypriot banks had to seek out this kind of high yielding but risky asset to finance their deposit inflows and their increasingly risky business model.
The silver lining in the crisis – wary depositors and more competition from banks to attract these deposits. 
As for the large uninsured depositors above €100,000 euros, now exposed by the Cyprus precedent to higher risks, the Cyprus bailout will certainly make them more wary about their exposure to similar losses in the future. Consequently, more competition among banks for this type of large deposits will emerge, an unambiguously good thing.
Tags: silver lining in cyprus, positives of cyprus banking crisis, wary bank depositors, eurozone’s wary depositors, iceland bank icesave, icesave scheme