October 5, 2022

Cyprus Bank’s Bailout Hands Ownership to Russian Plutocrats

But the Russians, though badly bruised, are now in a position to get something that has previously eluded even Moscow’s most audacious oligarchs: control of a so-called systemic financial institution in the European Union.

“They wanted to throw out the Russians but in the end, they delivered our main bank to the Russians,” said the Cypriot president, Nicos Anastasiades, in a June interview.

The March bailout hammered bank creditors and depositors in an early test of what has since become the official European Union policy of “bailing-in” banks. The policy is intended to force creditors and depositors to pay for a bank’s mistakes and to spare taxpayers from picking up the entire bill.

The strategy, however, has generated unintended consequences in the case of Cyprus. The exercise was meant to banish what Germany and other Northern European nations viewed as dirty Russian money from Cyprus’s bloated banks. Instead, it has pulled Russia even deeper into Europe’s financial system by giving its plutocrats majority ownership, at least on paper, of the Bank of Cyprus, the country’s oldest, biggest and most important financial institution.

“Whoever controls the Bank of Cyprus controls the island,” said Andreas Marangos, a Limassol lawyer whose clients include many Russians.

The biggest single chunk of shares — around 18 percent — is supposed to go to depositors who lost money in Cyprus’s now-defunct Laiki Bank, but this stake is likely to be controlled by Cyprus’s central bank. As a result of a forced conversion of Bank of Cyprus deposits into shares, however, a diverse and so far unorganized group of depositors, most of them Russians, will end up with a controlling stake.

Whether they want such a bank is another matter. Owning the Bank of Cyprus, which has been saddled with $11.7 billion in liabilities racked up by Laiki Bank, “is like owning cancer,” said Irakli Bukhashvili, the head of a financial services company serving Russians here in Limassol, the business capital of Cyprus.

Despite its wobbly condition, the Bank of Cyprus still holds a uniquely influential position in the economic and political affairs of a sun-swept nation that sits on potentially large reserves of natural gas and straddles strategic fault lines between East and West.

President Anastasiades, in a June letter to the European Central Bank that pleaded for help to keep the Bank of Cyprus afloat, described it as a “mega-systemic bank” that, if it failed, could bring down the entire Cypriot economy. With 5,700 employees and around half of all the island’s deposits, it dwarfs its rivals and reaches into every corner of the country through a vast network of branches, which now also includes the former offices of Laiki Bank.

Moscow, though furious over the billions lost by Russians in Cypriot banks, still sees Cyprus as a prize worth courting. The Russian government has pushed for access for its military aircraft to an air base in Paphos and for its warships to Cypriot ports.

When Cyprus first appealed for help from the so-called troika of international creditors — the European Commission, the International Monetary Fund and the European Central Bank — the main problem was Laiki, the country’s second-biggest bank and one that was already effectively insolvent. Instead of just throwing Cyprus a financial lifeline, as it had done with Ireland after a banking crisis that led the government to guarantee all the banks, the troika demanded that Laiki and the Bank of Cyprus share the burden of any rescue deal.

Depositors with large accounts in Laiki Bank were initially left with just 100,000 euros each, about $130,000, and the rest of their money was confiscated as the bank shut down. Those with more than 100,000 euros in the Bank of Cyprus lost access to 90 percent of their cash, although they have since been promised future access to some of their frozen funds. But, under final terms announced on July 30 by the Central Bank of Cyprus, large depositors in the Bank of Cyprus will have 47.5 percent of their money forcibly converted into shares, up from 37.5 percent in an original plan.

Dimitris Bounias contributed reporting from Nicosia, and Andrew E. Kramer from Moscow.

Article source: http://www.nytimes.com/2013/08/22/world/europe/russians-still-ride-high-in-cyprus-after-bailout.html?partner=rss&emc=rss

China Liberalizes Lending Rates

It was one of the strongest signs yet that the government intends to change the way banks operate and let market forces play a larger role in China, which has the world’s fastest-growing major economy.

The move was also part of a broader strategy to restructure the economy away from investment-fueled growth and reduce the role of the state in the economy, freeing up banks to lend to private entrepreneurs in the hopes of encouraging innovation.The central bank said in an announcement late Friday that beginning Saturday, the government would no longer set a minimum interest rate for corporate loans. That move could allow banks to lower rates and more fiercely compete for customers.

The government, though, chose not to lift its cap on lending rates, nor did it alter the ceiling it places on the rates banks pay to depositors, either of which economists say would have had more far-reaching effects.

Dong Tao, an economist at Credit Suisse, said on Friday that Beijing was showing a stronger determination to reform the financial system. “This is the beginning of China’s rate liberalization,” he said in an e-mail. “Removing the lending rate floor is less meaningful than removing the deposit rate ceiling, but I think the latter will come too in the coming months.”

China’s president, Xi Jinping, and Prime Minister Li Keqiang are pushing bold reforms, even as the economy shows signs of weakening. Economists have been increasingly concerned that in recent years banks in China have done a poor job allocating capital and evaluating risk. Because the government sets caps on the rates paid to depositors and sets minimum and maximum lending rates, Chinese banks benefit from big interest rate spreads far larger than most Western banks. Analysts say this system has also encouraged lax lending standards and may have fueled asset bubbles.

A few weeks ago, the government created a credit squeeze that made it difficult for banks to conduct short-term borrowing. The government said its decision to pull back credit from the overnight lending market was meant to force banks and financial institutions to improve lending standards and better guard against risk. Beijing’s new leadership team, which took office in March, has also promised to make the national currency, the renminbi, more freely convertible and to open up the nation’s capital account, and liberalizing interest rates is believed to be a necessary step before making those changes.

Whether the move on Friday would immediately lower borrowing costs is unclear, since most banks already lend at higher rates than the floor set by the central bank, experts say. But over time the move could help establish more flexible lending and borrowing rates and create a more efficient banking system.

“It means banks could charge rates freely according to their own risk assessments,” said Wang Tao, an economist at UBS who is based in Hong Kong.

The central bank, known as the People’s Bank of China, did not alter the floor it sets on mortgage rates because of worries about property speculation. The central bank also said it was not ready to scrap the ceiling on deposit rates because of the risks involved.

“The central bank will work with other departments to improve the fundamental conditions to liberalize deposit rates steadily and orderly,” the bank said in its statement Friday.

Article source: http://www.nytimes.com/2013/07/20/business/global/china-liberalizes-lending-rates.html?partner=rss&emc=rss

High & Low Finance: Big Banks Grumbling About Planned Capital Rules

One result is that the American banks appear to have a competitive advantage. Being relatively well capitalized, they can afford to lend. That is less true in Europe.

Keep that fact in mind as the debate goes on about the new capital rules that United States regulators proposed this week for the largest American banks, the ones with more than $700 billion in assets. Some of those banks will need to have a lot more capital in a few years than they have now if the proposed rules are not watered down.

The banks were relatively restrained in their reactions this week, leaving it to trade groups to voice their complaints, which have a familiar ring to them.

“Ever-higher capital rules,” warned Robert S. Nichols, the president of the Financial Services Forum, which includes 19 large financial companies, “while a critically important element of safety and soundness, can become prohibitive and actually lead to reduced capability to lend to our nation’s families and businesses at a time when the economic recovery remains fragile.”

That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance. Depositors have no reason to care whether the bank is healthy, so a risky bank is not at a competitive disadvantage. The problem gets worse when those who buy bonds issued by banks conclude that their investments are effectively guaranteed by the government.

“Banks have creditors who are not worried about risks,” says Anat Admati, a Stanford finance professor and co-author of a book, “The Bankers’ New Clothes,” that calls for tougher capital rules. “If they were normal corporations, the creditors would not stand for it.”

It was never easy for regulators to determine how much capital was needed, but it became more difficult as financial innovations spread. That led to the 1988 adoption of model rules by a group of central banks and regulators that was based in Basel, Switzerland. That accord, later called Basel I, set up risk weightings for various types of assets, allowing for less capital for less risky assets. As the inadequacies of such a fixed system became clear, the regulators moved to one that allowed more fine-tuning, called Basel II. That allowed banks to use their own models — or credit ratings from Moody’s, Fitch and Standard Poor’s — to determine just how risky an asset was, and therefore how much capital was needed.

“Risk weighting is based on a very arcane, very complicated series of ratios and formulas that are immediately gamed and makes the system more fragile,” Thomas M. Hoenig, the vice chairman of the Federal Deposit Insurance Corporation, said this week after the F.D.I.C. voted to propose the new rules, along with other regulators. He said that the average risk weighting of bank assets fell, year after year, as the banks became better at coping with the rule.

Those risk-weighted assets form the basis of the capital figures banks cite. If a bank has 5 percent capital, it means capital equals 5 percent of the assets after risk adjustments. Until recently, government bonds from European countries were zero weighted, meaning that they did not count at all. Collateralized debt obligations — many of which turned out to be extremely risky — had only a 7 percent weighting, Mr. Hoenig said.

The result was that banks tended to load up on the highest-yielding assets with a given risk weighting. Because many mortgage securities had AAA ratings, that led banks as far away as Germany to lose a lot of money when the subprime mortgage market in the United States collapsed.

Under the latest, post-crisis rules — Basel III — there is supposed to be a leverage test as a supplemental measure. That measurement counts capital as a percentage of all assets — Treasury bills or junk bonds. The United States has long had such a test, though it was relatively lenient, but many other countries did not.

Floyd Norris comments on finance and economics in his new blog at norris.blogs.nytimes.com.

Article source: http://www.nytimes.com/2013/07/12/business/economy/big-banks-grumbling-about-planned-capital-rules.html?partner=rss&emc=rss

Swiss Panel Recommends Exchange of Bank Data With EU

The world’s biggest offshore financial centre, with $2 trillion (1.27 trillion pounds) in assets, is under massive pressure from the EU and elsewhere, as cash-strapped states seek to stop tax evasion and close loopholes.

“The fundamental ideas of the strategy would be that Switzerland takes an active step in the international tax debate,” the commission, led by former top Swiss government economist Aymo Brunetti, said in the report.

The recommendations come shortly before the Group of Eight (G8) leading economies meet next week in Northern Ireland, where tax avoidance is likely to figure on the agenda.

Switzerland has recently come under increased pressure to fall into line with the EU after Austria and Luxembourg said they were prepared to share data on foreign depositors, but Swiss politicians remain deeply divided on the issue.

At the same time, the country is also struggling to reconcile its strict secrecy laws with a U.S. crackdown on wealthy Americans using hidden Swiss accounts to dodge taxes.

“The most recent international developments concerning automatic information exchange (AIE) indicate the pressure on Switzerland to adopt a (global) AIE regime is being kept up and even increasing,” the Swiss Bankers Association (SBA) said in a statement.

“Swiss banks are keen to pro-actively negotiate with the EU on expanding the taxation of savings income and a type of information exchange acceptable to the EU,” the SBA said.

Swiss Finance Minister Eveline Widmer-Schlumpf, who was present at the report’s presentation, said the government would review the report and draw conclusions in September.

The report set out conditions for any automatic information exchange agreement with the EU, including access to financial markets. Cooperation should be withdrawn if this access was obstructed, it said.

Switzerland has accused the EU of being protectionist and fragmenting global markets with new rules that are unfair to countries outside the bloc, including the draft EU law MiFID, which imposes stringent obligations on companies from non-EU countries wanting to do business in the bloc.

“Market access is important and must be a precondition,” Widmer-Schlumpf said.

If an agreement could not be reached with the EU, the alpine nation would continue to work with the Organisation for Economic Cooperation and Development (OECD) towards a global solution, according to the report.

(Reporting by Alice Baghdjian; Editing by Toby Chopra, Ron Askew)

Article source: http://www.nytimes.com/reuters/2013/06/14/business/14reuters-swiss-banks-tax.html?partner=rss&emc=rss

News Analysis: Calculating Impact of Cyprus’s Bank Bailout

The magnitude of the losses, disclosed late Friday and confirmed Saturday by Cypriot officials, has provoked concern that depositors in second-tier euro zone banks in Slovenia and Italy might withdraw their savings from those institutions.

It has also raised fears that countries like Malta and Luxembourg, which like Cyprus have banking sectors many times bigger than their economies, might soon find it harder to gain access to international bond markets.

One relevant lesson might lie not elsewhere in the euro zone but in the carcass of a Los Angeles-based savings and loan institution, IndyMac Bancorp, that failed five years ago and required a bailout. IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss — 50 percent on deposits above the levels insured by the Federal Deposit Insurance Corporation. Rather than causing a panic and a bank run elsewhere, IndyMac’s debacle proved to be a largely contained disaster with little fallout.

“Just as you did not see mass panic and deposit runs in the U.S. after IndyMac, what happened in Cyprus is not going to spill over into Europe,” said Jacob Funk Kirkegaard, a specialist in banking and government debt at the Peterson Institute for International Economics in Washington.

IndyMac needed rescuing because, like the Cypriot bank, it placed a large bet just before one of the biggest recent credit disasters. For IndyMac, the calamity was the collapse of the subprime mortgage market in the United States. For the Bank of Cyprus, it was the collapse of Greek government bonds, in which it and other Cypriot banks had invested heavily, seeking an adequate return on the billions of euros of deposits that had inflated their balance sheets.

“How unique is Cyprus? Pretty unique actually,” Mr. Kirkegaard wrote in a research note.

He pointed out that compared with other countries with huge banking systems relative to their economies — notably Malta, at about eight times gross domestic product, and Luxembourg at more than 22 times G.D.P. — Cypriot banks had much lower levels of equity to cushion against failing assets. What is more, it is the subsidiaries of foreign banks, which have little or no exposure to the local economies, that make up the bulk of the Maltese and Luxembourg banking systems.

By comparison, many of the Cypriot banking assets that grew to be seven times the size of the country’s economy consisted of corporate, construction and mortgage loans to the Cypriot and Greek economies, which tied the health of these banks directly to those sagging economies.

As proponents of the Cypriot losses argue, just as it was fair that the large depositors that bankrolled IndyMac’s subprime excesses in 2008 pay the cost for the bank’s failure, so it is right that Cypriot savers — the largest of whom were Russian billionaires chasing high-yielding deposits — suffer a similar fate.

“There were stories of pain, too, at IndyMac, but in the U.S., we paid little attention to it,” Mr. Kirkegaard said. “This will impose a lot of pain on Cypriot society, but the outcome will not be that much different.”

IndyMac, when it was rescued by American regulators in July 2008, had become the ninth-largest originator of mortgage loans in the United States, relying largely on large, uninsured deposits to finance a lending spree in some of the riskiest areas of the housing market.

And while the American government backed savers with deposits of less than $100,000, those with more deposited at IndyMac were required to accept a loss of 50 percent when it declared bankruptcy. (The federal government helped prevent a broader panic by later raising the deposit insurance threshold to the current $250,000.)

As the Cypriot government begins investigating the misadventures of the Bank of Cyprus and the second-largest, Laiki, bankers and lawyers in Nicosia have begun to argue that the disastrous venture by the Bank of Cyprus into Greek bonds could well have been avoided.

Local bankers say the bank had more or less sold out of its Greek bond position by early 2010 as Greece’s problems became evident.

Article source: http://www.nytimes.com/2013/04/01/business/global/calculating-impact-of-cypruss-bank-bailout.html?partner=rss&emc=rss

Head of Cyprus’s Biggest Bank Resigns

Antreas Artemis complained that authorities rode roughshod over him and his board of directors by moving unilaterally to sell off units of the bank in Greece and planning to hit big depositors to pay for losses.

The changes at the Bank of Cyprus are part of the latest bailout deal negotiated between Cypriot officials and the so-called troika of international lenders: the European Commission, the European Central Bank, and the International Monetary Fund.

Mr. Artemis’s resignation, while not wholly unexpected following the controversial decision by international lenders to impose significant losses on the bank’s larger depositors, still caught the market by surprise and was a further reminder of how volatile and uncertain Cyprus’s financial system has become in recent days.

Bankers say that the fact that the board of the country’s largest bank had been left largely in the dark as its future was being discussed in Brussels and that an outside administrator had recently been named to oversee the bank in the coming months were factors likely to have contributed to his decision.

Despite promises since last week that the country’s banks would reopen Tuesday, the government late Monday ordered all of them, including the Bank of Cyprus and Cyprus Popular Bank — the nation’s largest financial institutions, with most of the accounts on the island — to stay shut through at least Thursday. The extended bank closing is to reduce the risk of a bank run by nervous depositors. Automated cash withdrawals will be limited to €100 a day.

On Tuesday, the Cypriot central bank said it had appointed Dinos Christofides, a well-known local businessman, to act as special administrator for Bank of Cyprus. Mr. Christofides, who operates a business advisory service in Nicosia, has long experience in auditing and advising major local and international companies.

Administrators are often assigned by governments, creditors or courts to replace management at troubled institutions, with a goal to restoring their finances.

In a statement, the bank said the resignation had not been accepted and “will only apply if not withdrawn within one week,” Reuters reported.

The island’s faltering banks suffered a new indignity on Tuesday, as Fitch Ratings said it was cutting its credit grades on Cypriot banks because of the losses imposed by the bailout deal on senior creditors.

Fitch said it was cutting its rating on Cyprus Popular Bank, known as Laiki Bank, to “default.”

Fitch also cut its rating on Bank of Cyprus to “restricted default,” a grade Fitch said means the bank has experienced a payment default on a bond, loan or other material obligation but has “not entered into liquidation or ceased operating.”

Laiki’s soured assets are being hived off into a so-called bad bank. Its good assets are being transferred to Bank of Cyprus, which is being recapitalized by converting uninsured depositors’ claims into equity. Fitch said it expects the losses on Bank of Cyprus’s uninsured deposits “to be material.”

Piraeus Bank of Greece said Tuesday it had acquired the Greek operations of three Cypriot lenders — Bank of Cyprus, Laiki Bank and Hellenic Bank — for €524 million.

The Greek branches of the Cypriot banks will reopen on Wednesday, Piraeus Bank said, and deposits “will not be subject to any emergency contribution or ‘haircut’ decided on for Cyprus.”

The acquisition, proposed last Friday by Greek authorities, “secures the stability of the Greek banking system, helps Cyprus tackle its crisis and protects depositors, customers and staff” of the banks, Piraeus Bank said.

The upbeat statement did not reflect the rueful mood in Greece, where newspaper headlines continued to lash out at Germany and Northern Europe for their tough stance in negotiations and lamented the possible implications for Greece, which is bracing for the return of troika inspectors next week.

Article source: http://www.nytimes.com/2013/03/27/business/global/europe-officials-seek-to-contain-cyprus-damage.html?partner=rss&emc=rss

News Analysis: Cyprus Bailout Shows Strictness but Signs of Disarray

First, there will be no more bailouts without bail-ins, meaning investors and even some depositors in banks that get in trouble may have to pay at least part of the price of rescuing them. European leaders recognize that their voters will no longer tolerate having to pay to save other countries’ irresponsible banks and their clients.

Second, there is a strong message that if the euro zone is going to work, with a banking union that has credibility, there will be no more “casino economies,” little islands like Cyprus with banking sectors many times larger than their gross domestic product, that do not follow the rules and make everyone else vulnerable.

The package for Cyprus marks a victory, of sorts, for Germany and other hard-liners inside the euro zone that are determined to signal that banks and countries will be rescued only when they do penance for their past mismanagement, as determined by their rescuers. Supporters say this will preserve public support for the euro and encourage greater prudence down the road.

Critics, however, say the Cyprus bailout was so haphazardly handled that it underscored the chaotic nature of European decision making more than it sent an unmistakable message about a new approach to bailouts.

Many economists also say euro zone countries may have done themselves further harm by threatening to confiscate part of the savings of depositors in Cypriot banks. If large investors and even ordinary savers worry about a seizure of their assets whenever a bank gets in trouble, the private sector may grow more reluctant to steer funds toward troubled financial institutions, putting more pressure on the European Central Bank to pump in rescue funds.

Some researchers have also forecast that the Cyprus crisis will contribute to financial fears around Europe, which could end up costing Europeans far more in lost growth than they gain in savings from reducing the cost of bailing out Cypriot banks.

On Monday, after Reuters quoted Jeroen Dijsselbloem, the new head of the Eurogroup of finance ministers, as saying the Cyprus bailout could be a new template for resolving regional banking problems, stock markets in Europe and around the world dropped and the value of the euro dipped as well, giving up early gains. That appeared to reflect investor pessimism that requiring savers to bail out troubled banks would prove a good model for euro zone rescues.

The Cyprus crisis elicited a strong and uncompromising response partly for geostrategic reasons, specifically because the role of Russian money, laundered and otherwise, is becoming a major consideration. European Union officials, for example, speak privately of their deep suspicion that European position papers about negotiations with Russia were regularly leaked to Moscow from Cyprus, and European countries that are NATO members are unhappy with the laxity with which Cyprus deals with Russian spying and the way it holds up European cooperation with the alliance over Turkey.

Germany and other countries of northern Europe, either former Soviet colonies like the Baltic nations or sometimes anxious neighbors, like Finland, were not going to try to sell to their voters the idea of bailing out Russian oligarchs — and Russian officials with secret bank accounts.

Toomas Hendrik Ilves, the president of Estonia, said he and his European colleagues were shocked to hear Cypriot officials say, “Brussels is far away, and Russia is a good friend.”

Cyprus also lost sympathy by trying to protect depositors with more than 100,000 euros from too high a contribution — considered an effort to protect Russian money, for the most part — while proposing to tax depositors with accounts under that figure, which are supposed to be insured. “It meant only that they were in bed with the Russians,” said Mr. Ilves, who is blunter than most officials. “And German voters, let alone Estonians, were not going to accept bailing out Russian oligarchs.”

Politically, he said, “you can talk about solidarity with the poor Greeks, and that’s hard enough, but solidarity with thugs and money launderers is a different matter.”

However tiny, Cyprus also appeared to call into question, once again, the sustainability of the euro as a common currency for so many disparate economies.

Steven Erlanger reported from Paris, and James Kanter from Brussels.

Article source: http://www.nytimes.com/2013/03/26/world/europe/cyprus-bailout-shows-strictness-but-signs-of-disarray.html?partner=rss&emc=rss

Hindsight: Deposit Insurance, and the Historical Reasons for It

Because bank deposits in Cyprus, and virtually everywhere, are insured, the plan shocked many people who figured that this insurance was the one financial safety net that was still truly “safe.”

The Cypriot Parliament shot down the plan, though a smaller hit to depositors — many of whom are wealthy foreigners — was still in the offing late last week. Yet the tempest in the eastern Mediterranean is a reminder that depositors, in fact, are also creditors of banks and are potentially at risk.

In the United States, deposit insurance is viewed as sacrosanct. But even here, such plans haven’t always worked, and at least until recent times they have been contentious.

If the nation has a father of bank insurance, it is Joshua Forman, one of the promoters of the Erie Canal. Early in the 19th century, New York State had a string of bank failures, and Martin Van Buren, then governor, asked him to restructure the banking industry. Forman’s insight was that banks were vulnerable to chain-reaction panics. As he put it — in a line unearthed by the Harvard Business School historian David Moss — “banks constitute a system, being peculiarly sensitive to one another’s operations, and not a mere aggregate of free agents.”

In 1829, Forman proposed an insurance fund capitalized by mandatory contributions from the state’s banks. Debate in the State Assembly was heated. Critics said failures could overwhelm the fund; they also argued that its very existence would reduce the “public scrutiny and watchfulness” that restrained bankers from reckless lending. This remains the intellectual argument against insurance today. But Forman’s plan was enacted, and subsequently five other states adopted plans.

All did not go smoothly. In the 1840s, during a national depression, 11 banks in New York State failed and the insurance fund — as prophesied — was threatened with insolvency. The state sold bonds to bail it out.

After the Civil War and the establishment of nationally chartered banks, the state insurance systems were allowed to die. But banking panics and money shortages in the 1870s and ’80s revived the issue. Republicans thought the way to stop panics was to establish a central bank. Democrats were inveterate central-bank haters, but they needed a solution. William Jennings Bryan, the party’s three-time presidential nominee, called for deposit insurance, especially to protect small depositors.

Bryan lost the elections, but he won a victory of sorts on insurance. In 1907, a Wall Street panic led to a depression, and banks nationwide resorted to doling out scrip rather than cash. With the economy still in free-fall, Oklahoma adopted deposit insurance. Republicans were hotly opposed. President William Howard Taft, running against Bryan for president in 1908, said the Oklahoma law “put a premium on reckless banking.” The industry predicted that the system would fail. Depositors, argued James Laughlin, a banking expert of the day, should rely on the “skill, integrity and good management” of bankers.

Oklahomans thought otherwise. So great was the demand for insurance that Oklahoma banks with national charters liquidated and reorganized as state banks to participate. In fact, people in neighboring Kansas began to deposit in Oklahoma, forcing Kansas to enact a similar plan. Ultimately, eight states adopted insurance.

Their experience, alas, bore out the critics’ warnings. Depressed farm prices led to waves of bank failures in the 1920s, and one by one state systems folded.

Roger Lowenstein is writing a book on the origins of the Federal Reserve.

Article source: http://www.nytimes.com/2013/03/24/business/deposit-insurance-and-the-historical-reasons-for-it.html?partner=rss&emc=rss

Cyprus Rejects Bank Deposit Tax, Scuttling Bailout Deal

The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that would allow the country to receive a financial lifeline and avoid the specter of a devastating default that would reignite the euro crisis.

Lawmakers rejected the plan with 36 voting no and 19 abstaining arguing that it would be unacceptable to take money from account holders. Some in the opposition party even suggested abandoning a European Union bailout altogether and appealing to Russia or China to lend Cyprus the funds it needs to keep the economy and its banks afloat. One member of Parliament who was out of the country did not vote.

Analysts had also raised the possibility of bank runs and a halt in liquidity to Cypriot banks from the European Central Bank if the measure did not pass, meaning banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

The measure failed despite a revision that would remove some objections by exempting small bank accounts from the levies.

The original terms of the bailout called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The levies, a condition imposed by Cyprus’s fellow E.U. members, are designed to raise €5.8 billion of the total €10 billion bailout cost.

Under a new plan put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

The central bank governor, Panicos O. Demetriades, had said the revised plan would fall €300 million short of the €5.8 billion demanded by the international lenders. The gap would be considered a breach of the bailout agreement, he said, and “perhaps might not be accepted” by the bailout negotiators.

And even as Mr. Anastasiades submitted the revised plan to Parliament, he had acknowledged that the changes probably would not be enough to secure a majority in the 56-member legislature. “I estimate that the Parliament will turn down the package,” he said on state television as he headed into a series of meetings.

The managing director of the International Monetary Fund, Christine Lagarde, said earlier Tuesday that she was in favor of modifying the agreement to put a lower burden on ordinary depositors. “We are extremely supportive of the Cypriot intentions to introduce more progressive rates,” she said in Frankfurt.

She had urged leaders in Cyprus to quickly approve the plan agreed by European leaders in Brussels last weekend. “Now is the time for the authorities to deliver on what they have commented,” Ms. Lagarde said.

She complained that critics have not recognized the value of the agreement, in that it would force banks in Cyprus to restructure and become healthier.

In Brussels, Simon O’Connor, a spokesman for Olli Rehn, the E.U. commissioner for economic and monetary affairs, said Tuesday that finance ministers from countries using the euro had agreed the previous night in a teleconference that Cyprus could adjust the way the levy would operate.

But Mr. O’Connor said the E.U. authorities were still waiting to see whether the adjustments being discussed in Cyprus delivered “the same financial effect” as the agreement between Cyprus and international lenders in the early hours of Saturday.

“On the parameters of this levy, we will not comment as long as that’s a process that’s still under way,” Mr. O’Connor said.

On the prospect that expatriates in Cyprus may not have access to their bank accounts any time soon, the British Ministry of Defense said Tuesday that it had sent a Royal Air Force plane to Nicosia with €1 million on board to offer loans to British military personnel there.

The money, it said, was meant to “provide military personnel and their families with emergency loans in the event that cash machines and debit cards stop working completely.”

The ministry also said that it offered to pay the salaries of employees in Cyprus into British bank accounts. “We’re determined to do everything we can to minimize the impact of the Cyprus banking crisis on our people,” the ministry said in a statement.

James Kanter contributed reporting from Brussels, Jack Ewing contributed from Frankfurt and Julia Werdigier contributed from London.

Article source: http://www.nytimes.com/2013/03/20/business/global/cyprus-rejects-tax-on-bank-deposits.html?partner=rss&emc=rss

Facing Bailout Tax, Cypriots Rush to Get Their Money Out of Banks

The decision — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.

A scheduled parliamentary vote on the plan at an emergency meeting Sunday was postponed until Monday. The delay was to give a chance for the newly elected Cypriot president, Nicos Anastasiades, to brief lawmakers, according to the president’s office.

Although banks placed withdrawal limits of €400, or about $520, on A.T.M.’s, most had run out of cash by early evening. People around the country reacted with disbelief and anger.

“This is a clear-cut robbery,” said Andreas Moyseos, a former electrician who is now a retiree in Nicosia, the capital. Iliana Andreadakis, a book critic, added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”

In Nicosia, a crowd of about 150 demonstrators gathered in front of the presidential palace late in the afternoon after calls went out on the social media to protest the abrupt decision, which came with almost no warning at the beginning of a three-day religious holiday on the island.

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than €100,000 effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits of less than that amount are to be taxed at 6.75 percent, meaning that Cypriot creditors will be confiscating money directly from retirees, workers and regular depositors to pay off the bailout tab.

Mr. Anastasiades said taxing depositors would allow Cyprus to avoid implementing harsher austerity measures, including pension cuts and tax increases, of the type that have wreaked havoc in neighboring Greece. That thinking appealed to some Cypriots, including Stala Georgoudi, 56. “A one-time thing would be better than worse measures,” she said. “Procrastinating and beating around the bush would be worse.”

But Sharon Bowles, a British member of the European Parliament who is the head of the body’s influential Economic and Monetary Affairs Committee, said the accord amounted to a “grabbing of ordinary depositors’ money” in the guise of a tax.

“What the deal reflects is that being an unsecured or even secured depositor in euro-area banks is not as safe as it used to be,” said Jacob F. Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”

Cyprus had been a blip on the radar screen of Europe’s long-running debt crisis — until now.

Hobbled by a devastating banking crisis linked to a slump in Greece’s economy, where Cypriot banks made piles of loans that are now virtually worthless, Cyprus on Saturday became the fifth country in the euro union to receive a financial lifeline since Europe’s debt crisis broke out. As the euro zone’s smallest economy, Cyprus had hardly been considered the risk for the euro group that Greece, Ireland, Portugal or Spain were.

But the surprise policy by the International Monetary Fund, the European Central Bank and the European Commission is the first to take money directly from ordinary savers. In the bailout of Greece, holders of Greek bonds were forced to take losses, but depositors’ funds were not touched.

Article source: http://www.nytimes.com/2013/03/18/business/global/facing-bailout-tax-cypriots-rush-to-get-their-money-out-of-banks.html?partner=rss&emc=rss