Saturday, 16 March 2013
Bank depositors in Cyprus take a hair cut.
Of course that is unfair on depositors because it breaks the conditions on which they originally deposited their money. On the other hand there is some justice in a system where depositors lose out when their bank fails, and as follows.
If I buy shares or bonds in corporation X or lend to a business run by a friend or relative, and it all goes wrong, then I lose out. In contrast, if I deposit money in a bank, and the bank lends to corporation X or to that friend of mine, and the bank fails, then the taxpayer rescues me.
Now can someone explain the logic there?
Moreover, what’s the taxpayer doing underpinning or subsidising what is supposed to be a commercial operation: a bank? Explanations, please.
There is of course a simple solution to the above sudden and forced hair cut imposed on Cypriots, and to the bank subsidy problem. It is thus.
Give depositors a choice. First they can have their money 100% safe, in which case the money is not invested at all. It’s not put at risk, so there is no taxpayer exposure. But the fact that the money is not invested means it earns no interest – not that that’s a big shock to the system, given that depositors currently get about zero interest on current accounts (“checking” accounts in the US).
Second, if depositors want to act in a commercial manner, they can sod*ing well accept the normal risks involved in commerce: and that includes the possibility that they lose their money.
But the risks don’t have to be of any significance in order to enable people to earn a little interest. For example if a bank set up a unit trust (or similar entity) that loaned money just to mortgagors with a significant equity stake in their homes, say 30%, the risk would be vanishingly small. In contrast, loans to those with a smaller equity stake would pay more interest.
Problem solved. Under the latter system, banks as such can’t fail. Plus taxpayer funded subsidies of banks disappear.
Vickers, Basel III, Dodd-Frank . . . . are you listending?