The last few week to ten days have been fairly hectic to say the least. Starting with the news that Cyprus was to receive a bailout and also have to impose a tax on all depositors in Cypriot banks to a week of crisis meetings and eventual redraft to a new deal which I’m sure you have heard of by now.
The market has been focused on one comment by the Dutch finance minister and head of the Eurogroup in which he stated taxing depositors would be a template or precedent for any future bailouts. This has been retracted and altered slightly but the link below is from an interview with him in the FT.
You should read over this as it directly affects you. To me it reads that going forward any ” stakeholder” in a bank that is in trouble will be the first port of call when it comes to recapitalising said bank.
What this means is rather than the moral hazard of a bank getting in iver its head and then getting bailed out by the taxpayer, only those involved in said bank will be affected by the recapitalisation plans necessary.
This is a game changer in European banking and in a way solves a few issues.
-Moral hazard: As discussed EU exhaustion over bailing out bloated banks that took too many uncalculated risks. EU. Trying to put a stop to the ” bailout culture.”
– treating depositors as investors. Deposits once thought of as sacred when in fact they earn a rate of interest (currently very low ) but all the same it is an investment. Going forward it may be the case that these depositors will also shoulder the burden of failure.
– Banking model to return to traditional less sexier forms of long term investing in less risky assets, as much more capital will be required nay DEMANDED to be held on balance sheet by not only regulators but also depositors.
– Taxpayer footing bill for bank bailouts hopefully a thing of the past.
This is a profound change or perhaps a return to the old banking model perhaps in the pipeline. Either way it directly affects you and you should be aware that perhaps you savings are not as safe as you think and therefore you must be aware of the financial health of the bank you are currently with. Keep an eye for more analysis across the board in the future.