Cyprus bank deposit guarantee scheme – fact checking
Yesterday and today, the press and most of the blogs I follow are full of comments on the Cyprus Deal.
The summary is clear:
“Insured” bank deposits are going to be confiscated because of the evil (Germans/IMF/ECB). This is a catastrophe because no one will believe in bank deposit insurance any more.
What I find extremely interesting is the fact that no one actually bothered to really look at the so-called “bank deposit insurance” in Cyprus. The Central Bank of Cyprus has an English language description of the scheme on their homepage.
In the beginning it sounds like a “normal” deposit guarantee:
Deposit Protection Scheme (DPS) was established in September 2000, and operates since then, in accordance with Article 34 of the Banking Law of 1997 as subsequently amended, and the Establishment and Operation of the Deposit Protection Scheme Regulations of 2000 to 2009. In accordance with these Regulations, a Deposit Protection Fund has also been established which operates as a separate legal entity administered by a Management Committee.
The purpose of the DPS is to provide protection to deposits and compensate depositors in the event that a member bank is unable to repay its deposits. The DPS covers deposits denominated in all currencies.
But then this:
The maximum level of compensation, per depositor, per bank, is €100.000. This limit applies to the aggregate deposits held with a particular bank. When calculating the amount of compensation payable to a depositor, any loans or other credit facilities granted by the depositor’s bank are set-off against the deposits. Any counterclaims that the bank concerned may have against the depositor in respect of which a right of set-off exists, can also be set-off.
I have to admit that I didn’t check all European deposit guarantee schemes but setting of loans against your deposit first looks unique to me. So in practice this means if you have a 300 k mortgage from your bank and for some reason a deposit of 100k at the same bank, your guarantee is worth nothing/nada/niente/nichts.
So the proposed deal of getting a 6.75% haircut on deposits irrespective of outstanding loans will be a much better deal for many people than being the “beneficiary” of this so-called “deposit guarantee”. Maybe that is one of the reasons they did this ?
It also seems to be that the word “guarantee” means something different in Cyprus than in the rest of the (finance) world.