Tuesday, March 26, 2013

All easy - only bank resolution, deposit cuts and capital controls need to be implemented...

I cannot jump on the bandwagon of praise for the Cyprus decision because I see a potential nightmare ahead when I think of its implementation. Yes, it sounds good when regular savers are saved and when profiteers suffer some damage. But how is that going to work in practice? All depositors below 100 TEUR are regular savers and everyone else is a profiteer? All customers of most banks are regular customers but those of the two largest ones are profiteers?

To be sure, I have argued since the beginning that those who knowingly take risk in banks have to be called upon first when banks are to be rescued. This group begins with shareholders and moves on to semi-equity holders, interbank lenders and other 'professional market participants'. Depositors come last but even among depositors one should differentiate between 'professional market participants' and the others. And no one should ever play around with deposit insurance.

And, I hasten to add, it is good that this was finally recognized in Cyprus but it should have been recognized 3 years ago, beginning with banks in Germany, France & Co!

Here is an example given by a Cypriot university professor on German TV last evening which shows the potential nightmare very well:

A Cypriot takes a 300 TEUR loan from the Laiki Bank to finance the building of a house. That loan is deposited in a 'building account' from which all construction costs are paid. On day 1, the full 300 TEUR are in that account as 'deposit'. Overnight, the Cypriot loses 200 TEUR of those 300 TEUR while his loan remains at 300 TEUR. Makes sense? No, it doesn't, but that's going to happen the way I understand the planned implementation.

I think it is utterly wrong to take the figure of 100 TEUR (or any figure, for that matter!) to differentiate between regular savers/customers and profiteers. The differentiation is absolutely necessary but it should be made along the lines of deemed risk awareness of the depositors/customers.

Basel-2 has created the language of 'professional market participants'. Banks have 1-2 page questionnaires to be filled out to determine whether a customer is a 'professional market participant' or not. 'Professional market participants' are those who are deemed to know what they are doing. If a customer's account shows that several cross-currency swaps or other derivatives were transacted, that customer can be deemed to be a 'professional market participant'. If the account shows that a customer is transacting regular commercial business, it is not a 'professional market participant'.

The reason why this is more critical in Cyprus than elsewhere is that, apparently, Cypriot banks are much more funded by deposits than is normally the case. Normally, one gets quite a critical mass if one only aims at shareholders, semi-equity holders and interbank lenders. That critical mass is apparently not there in the Cypriot banking sector. Therefore, it is of utmost importance to differentiate among depositors in a way that is fair, just and - above all - makes sense!

Bank resolution - There better be a very good explanation/justification why there is a difference between the two large banks. Why one bank will be resolved and the other bank strengthened. Why the depositors/customers of one bank receive worse treatment than the depositors/customers of the other. I am sure some very smart lawyers are already out there chasing potential new clients...

Capital controls - If it is true that large sums of money could leave bank accounts (and the country!) during the current bank holiday, there better be an immediate investigation with the threat of enormous penalties. Happenings like this would totally undermine the credibility of everything which the government tries to achieve!


  1. Regarding capital controls and money leaving bank accounts, there is an interesting hint on another blog: http://coppolacomment.blogspot.de/2013/03/cyprus-banks-and-uk-deposits.html

    "Laiki Bank UK was open until last Friday, but is now permanently closed and will be wound up with Laiki Bank (Cyprus). It seems likely that Laiki Bank UK was one of the conduits through which money left Cyprus during the extended bank holiday."

    Perhaps there was simply forgotten or "forgotten" to close several foreign branches of cyprian banks?

    For the other points: Sounds interesting, sounds bad
    I was also strong favouring the found solution - banks have to be in danger of going broken just as any other industry.
    But how to react better? Russia was not willing to offer or lend money, Greece was not able to do, Europe was not willing to lend more money than they already did.
    What was quite a lot, 10 billion for 800.000 people = 12.500€ for every single inhabitant, just for bailing out two banks.

  2. Re Bank Resolution - why is there a difference between the two large banks? - who owns(ed) the banks might give some clues as to the answer to that ?

    I think Marfin has a slice of Laiki, Marfin is 18% owned by the Sheik of Dubai's SWF, I also read in a newspaper (one I don't trust much) that the Govt of Cyprus has a slice of Laiki. I can't see who owns BoC - reported as being 'widely held'

    Under Basel rules are depositors told in writing that their bank is classifying them as a 'professional market participant'(ppe), and what happens if they (the bank) don't do that?

    I heard an interview with a Cypriot fellow on HK Radio, he said he got a loan for more than €100K from the EU (I think he said the EIB) that was put into his BoC account a few days before the banks went on 'holiday'. Not sure if he was actually in HK. He said he'd waited months to get the loan approved.

    I wonder if the BoC's Guernsey branch has also been open during the bank 'holiday'.

    Australia has 2nd the largest offshore Cypriot community after the UK. Last year both banks sold their Australian operations, about 15 branches each. BoC to a 2nd tier local bank, its now called the Delphi Bank, and Laiki became Beirut-Hellenic (BoB subsidiary).

    Has Laiki or BoC sold any other offshore operations recently, and if not why did they both sell their Aussie operations within a few months of one another. Apart from the fact that they wanted the money - maybe pressure from local regulators, buyers saw an opportunity?


    1. According to Greek Reporter Marfin sold its interests in the Popular Bank (Laiki) to 'Cyprus' a little over 18 months ago - Vgenopoulos sees conspiracy against Laiki, Cyprus Bank remains the government’s pet

      To a layman it seems strange that a government should invest in Bank A, and 18 months later put it into receivership and give the best bits to Bank B. Surely its not some sort of political payback from a new government.

      I've been trying to wrap my head around the Cypriot political/government system, I'm still trying. It seems over-elaborate for a country of < 1 million, 1.2 million if you count the Turkish part, as compared to say India with its 1.2 billion people.


    2. If you want a yardstick for over-elaborate government, you are welcome to use Austria as a prototype. A population of 8 million has 9 full-fledged regional governments with full-fledged parliaments (in addition to the national government and 2 houses of parliament). The number of municipal governments with parliaments escapes my memory. In between, you have the district administration. Almost 30 social security administrations. Etc. etc.

    3. Re PMP: I can tell you how it works in Austria but since Austria does nothing other than implement EU and/or Basel-2 regulations, it should be the same everywhere else. And, BTW, I have been out of banking for 3 years...

      Only private invididuals who have a security 'depot' are officially and automatically classified. A 'depot' is where the customer invests in securities of a third party instead of the bank itself. A little old lady who no longer trusts the bank where she has a savings book and wants to buy 'risk-free' Austrian bonds instead, needs to open a 'depot'.

      To open a 'depot' requires the completion, typical in a personal meeting with the account representative from the bank and certainly no less than 1/2 hour, of a fairly detailed questionnaire. At the end of this exercise, the customer is classified into a 'risk preparedness category'. My bank uses 1-5 (1 meaning 'no risk' and 5 meaning 'full loss accepted').

      Each security which I buy has a risk classification. An Austrian bond would carry a 1; when I recently bought shares in OTE, I saw that it carried a 5. If a customer is classified as '1' but buys securities rated '3', he pops up on a control list of his account representitive for possible action. It may even be that the system blocks any order where the security's risk exceeds the documented risk preparedness of the customer.

      Bottom line: all private individuals who have a 'depot' are officially classified for their 'risk preparedness'.

      That leaves a lot of other depositors and that's where it gets tricky. I never said that it would be easy to classify all depositors before a deposit cut but it can and should be done, and that would take time. There is no button to punch which yields the proper results (unless one hits all of them).

      A simple way to reduce those 'other depositors' to a manageable size would be to start with an amount. I guess one could say that anyone having more than 10 MEUR of deposits is a PMP. I would even think that anyone having more than 1 MEUR is a PMP because I couldn't think of anyone owning that much money and not thinking about what he does with it. But that limit could be debated.

      One could also segregate corporate current accounts (operating accounts) because any credit balance there is not the result of investment decisions but, instead, of operational cash flow.

      There will certainly be other things to be considered once one gets into that process. The mosst important point is that objective rules are created and implemented so that any arbitrariness can be limited.

      In short, there is no perfect solution but with adequate due diligence, one can optimize the process to an extent where any unfairness which may still result will be a rather small one.

    4. As I understand Austria its a federal system much like India, Germany, Canada, USA, Switzerland etc, one could say they are over governed. But at the other end of the scale one gets a over-bearing central government dictatorship a'la UK, see Heseltine's "No Stone Unturned" report for an indication of where that might lead you.

      As far as I can make out Cyprus has a concessional constitution a'la Lebanon, Iraq etc - this is what I had in mind when I said 'elaborate'. But one of the two major players left the room 40 years ago, and I'm not sure how the gaps have been filled. Being a very small country there's not much material in my usual places, and what there is, is masked by the Greek v Turkey brouhaha. Nor have I come to grips with the different political parties. But I'm bacl home now so...

      Search seems to be working again.


  3. Yes, the cyprus mess. I hate to think what hours the banks people in cyprus are working, to get those Banks open on Thursday with these changes.

    What a mess. But that's what happens, when an insolvent bank is left operational, and the negotiations go terribly. There was a good interview on the Süddeutsche today, with the Laiki-Bank Chief Economist. They walked through the empty headquarters building in Nicosia.

    "The first bailout offer (across-the-board levy on accounts, rejected by Parliament last Tuesday) was a gift. Maybe from Merkel, who knows? Unjust too, of course, that everybody should pay for our insolvency, but at least the economy wouldn't have suffered. And they rejected it! I knew the next offer was going to be much worse"

    1. Of course the first one was "better", because it was leaving Laiki open. A Chief economist of a shut down bank doesn't get paid, does he...

    2. yes, he was open about his own interest in getting paid, of course.

  4. Already known?
    In german language: A Hint of a fonds manager to his clients that they can get their money out of cyprus banks via british branches. Probably many more of these hints have been sand by mails in the last days.
    Anyone wonders about money leaving cprus?

    1. These stories, like the story that money left foreign branches last week, are difficult to understand for me.

      Suppose an oligarch, to use that famous sterotype, wants to withdraw 10 MEUR from the London branch of a Cypriot bank. Where is that bank going to get the necessary liquidity from?

      From its HO in Cyprus? No way, because that HO was closed and thus could not get any liquidity from the ECB.

      From the interbank market? I doubt that anyone would make new loans to Cypriot banks these days anywhere.

      From the Bank of England? Technically, that might be possible but in practice I can't see that happen, either.

      So I am really looking forward to hearing more details about how this alleged drain of capital during a bank holiday could have worked.