There are pan-European laws that if a bank goes under you get the funds up to €100.000 you had in the bank reimbursed by the state.
The reason for this is that is that banks are the financial glue of society, and for better or worse we can't live without them. Bankruns can bankrupt a bank in a day, thus it's incredibly important that people feel secure in knowing that the money they have in the bank is secure no matter what.
This trust has just been put to the test with this incredibly stupid move.
Put to test? I would say that it has been totally voided. The people, by the people I mean the little guy, just got rolled.
Considering how well politicians like to play the class warfare card I am surprised even they went for it. Are those in Brussels just tone deaf? I am quite sure no politician here in America would have the guts to pull this, but I do not know how answerable those in Brussels are to the common man.
> I am quite sure no politician here in America would have the guts to pull this
I'm European and just after this was announced I was thinking what would happen if something similar would be enforced in the States. My conclusion was that that this would be one of the few acts by the US Government that would cause civil unrest.
That guarantee is clearly a dead letter in the case of Cyprus anyway, because there's no way that their government can make good on that promise in the face of multiple large bank collapses.
I already said that I agree it was a bad move due to the effect on confidence.
That guarantee is clearly a dead letter in the case of Cyprus anyway, because there's no way that their government can make good on that promise in the face of multiple large bank collapses.
That's where the EU steps in, or rather: was supposed to step in.
We were promised that our small savings accounts (<100k) are safe under all circumstances.
This came with the implied assumption that when shit hits the fan, they will shave what they need from the big accounts (>100k). Because those did either benefit from the gambling or can at least afford a lawsuit to recover some of their funds.
That promise was broken today. Many people will be very, very unhappy.
It's a good point, so I did a quick google search and it appears that in most countries the insurance is paid out by a seperate insurance fund that all banks pay in to over time. Presumably the fund is reinsured with lloyds, Berkshire Hathaway or something similar. So it's independent of the banks and the state.
I couldn't find anything specifically for Cyprus, so I'm not sure what the situation is there, but it's probably not much different from other countries.
"7) Will Deposit Guarantee Schemes have enough funds to pay out in case banks fail?
There have been shortcomings in some countries in the past. It is not feasible or necessary to provide schemes with an amount of money equivalent to all deposits. But banks will have to pay on a regular basis to the schemes, in advance, so a pot of money can be built up, and not only after a bank failure. Such 'ex-ante funds' will make up 75% of the overall funds in DGS.
If it becomes necessary, banks will have to pay additional contributions, which will contribute a further 25% of the target funds. If this is still insufficient, Deposit Guarantee Schemes could borrow from each other ("mutual borrowing facility") up to a certain limit (again 25% of target funds) or use additional funding sources such as borrowing on the financial market, e.g. by issuing bonds.
The new financing requirements will ensure that each scheme has enough funds in place to deal with a medium-size bank failure. This level is comparable to the existing well-financed schemes in the EU. These levels of funding will have to be achieved in all Member States by 2020.
Banks having a riskier business model than others will pay higher contributions to Deposit Guarantee Schemes - up to about 3 times more."
Indeed and most countries don't have medium sized banks, they tend to have big ("too big to fail") and small ones. When a bank failed in the Netherlands (SNS Reaal) the other week the government said that it would have cost EUR 30bn to the fund which would have crippled the 3 remaining large banks. Iceland had a similar system where the deposit insurance fund could not cover any of the banks failing, as they were all too big. The two big banks in Cyprus are huge.
The reason for this is that is that banks are the financial glue of society, and for better or worse we can't live without them. Bankruns can bankrupt a bank in a day, thus it's incredibly important that people feel secure in knowing that the money they have in the bank is secure no matter what.
This trust has just been put to the test with this incredibly stupid move.