Be­tray your bank be­fore your bank be­trays you

The Pak Banker - - OPINION - Jonathan Weil

WHAT'S a Slove­nian with sev­eral hun­dred thou­sand eu­ros in the bank sup­posed to do? Spread it out among at least a few dif­fer­ent banks, that's what. Or move the money out of the coun­try, while it's still pos­si­ble. Imag­ine what must be on the minds of any savvy de­pos­i­tors still left at Nova Kred­itna Banka Mari­bor d.d., now 79 per­cent- owned by Slove­nia's government. It was one of only four lenders in Oc­to­ber that failed the Euro­pean Bank­ing Author­ity's lat­est cap­i­tal-ad­e­quacy test, a rit­ual best known for how lax its stan- dards are. One that flunked was Bank of Cyprus Pcl, where unin­sured de­pos­i­tors face 40 per­cent losses as part of the coun­try's bailout terms. An­other was Cyprus Pop­u­lar Bank Pcl, also known as Laiki Bank, where unin­sured de­posits will fare far worse and the bank is be­ing shut. Cypriot banks' cus­tomers were com­pla­cent af­ter unin­sured de­posits went un­scathed in Ire­land, Greece, Spain and Por­tu­gal, the first euro-area coun­tries to seek in­ter­na­tional res­cues. Slove­ni­ans won't have that ex­cuse should their coun­try be next.

The former Yu­goslav repub­lic needs about 3 bil­lion eu­ros ($3.8 bil­lion) of fund­ing this year, while its strug­gling banks need 1 bil­lion eu­ros of fresh cap­i­tal, the In­ter­na­tional Mon­e­tary Fund said last week. Slove­nia's cen­tral bank this week urged the coun­try's new government to quickly carry out a plan to re­cap­i­tal­ize ail­ing lenders. It's a fa­mil­iar pat­tern.

The Cen­tral Bank of Cyprus warned months ago that the coun­try's banks needed an in­fu­sion of 10 bil­lion eu­ros -- which is more than half the size of the na­tion's econ­omy -- largely be­cause of heavy losses on Greek sov­er­eign debt held by Laiki and Bank of Cyprus. It seems a lot of cus­tomers were obliv­i­ous to the banks' de­te­ri­o­rat­ing health, or were con­fi­dent they would be cared for by some­body else. The coun­try is get­ting a 10 bil­lion-euro bailout, nine months af­ter it first asked for aid, ex­cept none of the money will go to the banks.

Sud­denly it should be dawn­ing on a lot of Euro­peans that de­posit­guar­an­tee lim­its mat­ter. In Slove­nia, the max­i­mum is 100,000 eu­ros per de­pos­i­tor, the same as in Cyprus. (De­posit- in­surance pro­grams vary among the 17 coun­tries that use the euro.) For a few days last week, it looked as if cus­tomers at Laiki and Bank of Cyprus would lose even some of their in­sured de­posits, which would have been a sac­ri­lege.

That plan was scrapped, but could resur­face else­where for all we know should some ge­nius at the Ger­man Fi­nance Min­istry in­sist upon it. The one con­stant among bailouts of euro-area coun­tries is that there is no rhyme or rea­son, much less fair­ness, in the way many de­tails get worked out.

Cypri­ots may be­moan the in­equities of their rough treat­ment, as might a bunch of wealthy Rus­sians who mis­took the is­land for a re­li­able fi­nan­cial cen­ter and failed to yank their money when they could. For the rest of Europe, the im­pli­ca­tions should be ob­vi­ous. Any­one who leaves unin­sured de­posits in a euro-area bank is on no­tice that their money can and will be taken from them, if that is what's de­manded by the troika of the IMF, the Euro­pean Com­mis­sion and the Euro­pean Cen­tral Bank.

Unin­sured de­posits aren't risk­less. Nor should they be. Still, it's un­clear why the euro area's cen­tral plan­ners sought to cre­ate a prece­dent that en­cour­ages cap­i­tal flight from weak coun­tries. This could lead to more in­sta­bil­ity, not less.

So far, there have been no signs of a mass ex­o­dus in coun­tries such as Italy or Spain. But de­posit mi­gra­tions can hap­pen slowly, with lots of time pass­ing be­fore they ap­pear in of­fi­cial statis­tics. Or maybe lit­tle will change and most bank cus­tomers will go on be­liev­ing "it can't hap­pen here," un­til one day it does.

Much good might come from restor­ing some sem­blance of nor­malcy to the hi­er­ar­chy of cred­i­tors in bank­ing. Even bet­ter would be to see Ger­many try it for a change with its own zom­bie lenders, such as Com­merzbank AG (CBK), which is still partly government-owned af­ter its bailout in 2009.

The way it's sup­posed to work at fail­ing banks is that share­hold­ers get wiped out first. Next the losses go up the lad­der from ju­nior debt hold­ers to se­nior bond­hold­ers, and then all the way to unin­sured de­pos­i­tors, if need be. Tax­pay­ers and in­sured de­pos­i­tors shouldn't have to ab­sorb oth­ers' losses or put money at risk to spare them. Trou­bled banks should have to fend for them­selves. This was the ap­proach im­posed on Cyprus. In or­di­nary cir­cum­stances, it would be con­sid­ered fair. The best ar­gu­ment for why it wasn't is that Cyprus had been lulled into be­liev­ing it would be treated just as well as Europe's other bailout re­cip­i­ents.

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