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There is a very important question here: What is the relationship between you and the bank? Up until recently, it has been considered sacrosanct that deposit h

There is a very important question here: What is the relationship between you and the bank? Up until recently, it has been considered sacrosanct that deposit holders be protected, no matter the cost. The convention and social contract has been that you deposit money for safe-keeping in a bank. We have seen this over the past few years across both Europe and the US, as insolvent banks have been bailed-out, nationalised, given secret loans, so that deposit holders are wholly protected. With Cyprus, this widely held belief is now in tatters. You as a deposit holder are now a creditor of the bank. As soon as you lend your money to the bank, it is no longer yours. The bank will provide you with interest for the duration of the loan. If the bank is no longer a going concern, you will no longer receive special treatment, but instead you must get in line with other creditors. Some may argue that this has always been the case[1], however it will be a genuine shock to many people, and any faith in deposit guarantee schemes has been dealt a severe blow when a week ago, the EU urged Cyprus to collectively punish all deposit holders regardless of balance. [1] For those in the UK, the House of Lords said in Foley v Hill 1848 http://www.uniset.ca/other/css/9ER1002.html http://www.uniset.ca/other/css/9ER1002.html "Money, when paid into a bank, ceases altogether to be the money of the principal... The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases... he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands... the banker is not an agent or factor, but he is a debtor."

niggler 14y ago
" it has been considered sacrosanct that deposit holders be protected, no matter the cost. " In 2011 and 2012, in the US, protecting the deposit holders was deemed sufficiently important that FDIC deposit insurance was extended to unlimited protection (now it is up to 250K)
- bitcartel 14y ago
  It appears nothing is more important than the banks. "Back in December 2012 the FDIC and the BoE published a joint paper outlining their new approach for how to resolve any future collapse of one of the Too-Big-To-Fail banks... 'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[1][2] ...the new system raids the Deposit Protection scheme, gives it to the bank instead of you and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme." [1] http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-banking-game/ http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-b... [2] http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf http://www.bankofengland.co.uk/publications/Documents/news/2...
inactivist 14y ago
I had to dig a bit to find similar info for U.S. law, but it appears to be true here as well: http://openjurist.org/866/f2d/1242/united-states-v-cache-valley-bank http://openjurist.org/866/f2d/1242/united-states-v-cache-val... "The district court determined that under Utah law the relationship between a bank and a depositor is generally that of a debtor to a creditor, citing Walker Bank & Trust Co. v. First Security Corp., 9 Utah 2d 215, 341 P.2d 944, 946 (1959). United States v. Intermountain Region Concrete Co., 636 F.Supp. at 284. Under this widely accepted principle, the depositor retains a right to withdraw those funds, which is usually described as a chose in action..."
nandemo 14y ago
> Up until recently, it has been considered sacrosanct that deposit holders be protected, no matter the cost. This is simply not true. Usually bank deposits are insured by the central bank or another such agency, but there's a limit (e.g. $100k per account). > The convention and social contract has been that you deposit money for safe-keeping in a bank. There's indeed a social contract of sorts, but since the most of the world converted to fractional-reserve banking, banks are not pure deposit banks anymore. In fact there have been many bank runs around the world, even in the US. http://en.wikipedia.org/wiki/List_of_bank_runs http://en.wikipedia.org/wiki/List_of_bank_runs It's well-known that individuals who own more cash than the insured limit should spread it over several bank accounts. Of course, that is moot when the government simply confiscates your money.
- bitcartel 14y ago
  It's considered sacroscant because deposit holders have always believed in the fiduciary duty of banks, even if the legal reality was different. Before 2008, I'm sure many people had never even heard of deposit guarantees, it was just assumed that your money was safe. The mentality of "It won't happen to me" has been reinforced since 2008 because we've seen how governments will go to extraordinary lengths to bail out banks. For example, no UK deposit holder has ever lost a penny despite Northern Rock, RBS, HBOS and IceSave all going bust. Yes, it's prudent for deposit holders to spread funds over several bank accounts. Read the small print though! If you're in the UK, the guarantee is per saver, per authorisation[1] e.g. two accounts in two different banks which are part of the same authorised banking group will only provide single coverage. However, even this might be an exercise in futility if the deposit insurance fund is empty. 'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[2] [1] http://www.fsa.gov.uk/register/firmMainSearch.do http://www.fsa.gov.uk/register/firmMainSearch.do [2] https://news.ycombinator.com/item?id=5435714 https://news.ycombinator.com/item?id=5435714
ghshephard 14y ago
Banks have always been a counterparty risk. To some degree, what's happening in Cyprus is just making that abundantly clear to everyone.
arethuza 14y ago
"it has been considered sacrosanct that deposit holders be protected, no matter the cost" I've never had any such expectation and I don't know anyone who does - banks can (and do) go out of business and generally there is an expectation that in such cases deposits might not be safe (although they are generally insured up to a set amount). If everyone assumed that there money was always safe in a bank then there would never be runs on banks - which seem to have been around as long as banks have.
DangerousPie 14y ago
> the EU urged Cyprus to collectively punish all deposit holders regardless of balance. No it didn't - the EU always wanted Cyprus to leave deposits under 100,000 EUR alone but impose a higher tax on large deposits. The leadership of Cyprus was the one who came up with the tax on lower deposits because they wanted to decrease the burden on high deposits. http://www.bbc.co.uk/news/world-europe-21825981 http://www.bbc.co.uk/news/world-europe-21825981 (last paragraphs)
- deleted 14y ago
  [deleted]
- bitcartel 14y ago
  From your link: "The 10bn-euro ($13bn; £8.6bn) bailout agreed with the EU and IMF had demanded that all bank customers pay a one-off levy and led to heavy cash withdrawals." The EU were happy to sign off on a proposal which would see deposits under 100,000 EUR being hit. Maybe it was their idea, maybe it wasn't, but they were okay with it. Ultimately it was the Cypriot parliament who rejected the proposal. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1] [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495
  - DangerousPie 14y ago
    My understanding of this article is that the EU told him he would have to come up with ~5bn, which they wanted him to do by imposing a tax on large deposits over 100,000. The comment by Schaeuble is pretty clear in this regard. Instead, the president opted to impose an additional tax on lower deposits in order to decrease the burden on large ones and keep Cyprus attractive as a tax haven. The EU wasn't happy with this but let him do it since it still fulfilled the requirements of raising 5bn. So yes, the EU demanded that SOME customers have to pay SOME levy and I am sure he "shared people's unhappiness" with those terms. But the one who decided to put the burden on the small deposit holders was the Cypriot government.
kalms 14y ago
"... the EU urged Cyprus to collectively punish all deposit holders regardless of balance." Is this true? I feel like citation is needed for that statement. I thought the EU actually wanted to protect the minor deposit holders, as it has been the case all over Europe up until now.
- masklinn 14y ago
  It's not true at all. All deposits under €100k are insured and protected.
  - bitcartel 14y ago
    It is true [1]. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout." The key thing here is that the EU accepted the original proposal, they were okay with seeing deposits of less than €100k being hit, regardless of any deposit guarantee. Public fury resulted in the Cypriot Parliament rejecting the proposal and the EU back-peddling from the original terms. [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495
    - pbreit 14y ago
      They EU might have been "ok" with it but not "happy" as you have suggested elsewhere. The president is obviously biased here.
    - deleted 14y ago
      [deleted]
flexie 14y ago
I worked as a lawyer in another European country for several years and at least once a week I would be contacted by Cypriotic lawyers, accountants and financial advisors who wanted to sell what I would describe as tax evasion schemes to my clients. The thing is that the banking laws of Cyprus permitted funds to be placed with few questions asked and the tax laws of Cyprus were designed to attract foreign companies. Cyprus had a 10 percent corporate tax and an almost 0 percent royalty tax. So the idea was for foreign companies to place their IPR in a Cyprus shell company and license it to their real companies back in Germany, the UK Scandinavia etc. http://www.cyprusprofile.com/documents/uploads/publications/The_Cyprus_new_IP_Regime.PDF http://www.cyprusprofile.com/documents/uploads/publications/... This way Cyprus piggybacked on other European countries for year. Now Cyprus is being rescued by the very countries that let the little island get away with these shenanigans for years. It was the Cyprus government itself that wanted normal depositors to pay the 10 percent tax on deposits because the Cyprus government was afraid of destoying the lucrative tax evasion business. The EU only wanted to levy it on the larger depositors. In the EU there has never been a general convention or social contract that larger deposits are safe. Only deposits up to 100,000 EUR. It is true that during the recent financial crisis larger depositors, bondholders, other creditors and even equity stakes have been saved again and again, but this is the exception, not the normal rule.
- seanhandley 14y ago
  "let the little island get away with"? You mean "let the bankers on the little island get away with". The banks should be liable and be allowed to fail without bailout and the system should be changed so depositors elect whether their funds are eligible for speculation (and share in any profits and accept any losses therein). The non-speculative accounts should be protected in law and the admin costs of running them maintained by monthly service fees.
masklinn 14y ago
> the EU urged Cyprus to collectively punish all deposit holders regardless of balance. Not only is that incorrect, it's the exact opposite of reality: Cyprus wanted a 10% levy across the board on all accounts, bigger EU countries refused to breach insurance on accounts under €100k, preferring that only uninsured accounts (>100k) be levied against/.
- bitcartel 14y ago
  In the original proposal from just over a week ago, the EU (and IMF) were quite happy to see deposit holders with under 100,000 EUR being hit. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1] [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495
smackfu 14y ago
Very similar thing happened with a US money market fund a few years ago. They are supposed to be rock solid, always being worth $1 per share and paying out a paltry amount of interest. But safe. So basically, like a bank (but without the FDIC protections). When Lehmann Brothers went down, the Reserve Primary Fund suddenly didn't have enough money to pay out everyone, which had the same effect of "getting in line with the other creditors". They actually had almost all the money, but distributing it took nearly a year IIRC. http://en.wikipedia.org/wiki/Money_market_fund#September_2008 http://en.wikipedia.org/wiki/Money_market_fund#September_200...
Retric 14y ago
Prior to the FDIC american banks had that failed ended generally took there depositors savings with them. Even now people over the FDIC cap have zero actual protection in the US. But, they are also the people that are most politically influential which buys them a lot of under the table deals when the bank is large enough.

niggler 14y ago

" it has been considered sacrosanct that deposit holders be protected, no matter the cost. " In 2011 and 2012, in the US, protecting the deposit holders was deemed sufficiently important that FDIC deposit insurance was extended to unlimited protection (now it is up to 250K)

bitcartel 14y ago
It appears nothing is more important than the banks. "Back in December 2012 the FDIC and the BoE published a joint paper outlining their new approach for how to resolve any future collapse of one of the Too-Big-To-Fail banks... 'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[1][2] ...the new system raids the Deposit Protection scheme, gives it to the bank instead of you and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme." [1] http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-banking-game/ http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-b... [2] http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf http://www.bankofengland.co.uk/publications/Documents/news/2...

inactivist 14y ago

I had to dig a bit to find similar info for U.S. law, but it appears to be true here as well: http://openjurist.org/866/f2d/1242/united-states-v-cache-valley-bank http://openjurist.org/866/f2d/1242/united-states-v-cache-val... "The district court determined that under Utah law the relationship between a bank and a depositor is generally that of a debtor to a creditor, citing Walker Bank & Trust Co. v. First Security Corp., 9 Utah 2d 215, 341 P.2d 944, 946 (1959). United States v. Intermountain Region Concrete Co., 636 F.Supp. at 284. Under this widely accepted principle, the depositor retains a right to withdraw those funds, which is usually described as a chose in action..."

nandemo 14y ago

> Up until recently, it has been considered sacrosanct that deposit holders be protected, no matter the cost. This is simply not true. Usually bank deposits are insured by the central bank or another such agency, but there's a limit (e.g. $100k per account). > The convention and social contract has been that you deposit money for safe-keeping in a bank. There's indeed a social contract of sorts, but since the most of the world converted to fractional-reserve banking, banks are not pure deposit banks anymore. In fact there have been many bank runs around the world, even in the US. http://en.wikipedia.org/wiki/List_of_bank_runs http://en.wikipedia.org/wiki/List_of_bank_runs It's well-known that individuals who own more cash than the insured limit should spread it over several bank accounts. Of course, that is moot when the government simply confiscates your money.

bitcartel 14y ago
It's considered sacroscant because deposit holders have always believed in the fiduciary duty of banks, even if the legal reality was different. Before 2008, I'm sure many people had never even heard of deposit guarantees, it was just assumed that your money was safe. The mentality of "It won't happen to me" has been reinforced since 2008 because we've seen how governments will go to extraordinary lengths to bail out banks. For example, no UK deposit holder has ever lost a penny despite Northern Rock, RBS, HBOS and IceSave all going bust. Yes, it's prudent for deposit holders to spread funds over several bank accounts. Read the small print though! If you're in the UK, the guarantee is per saver, per authorisation[1] e.g. two accounts in two different banks which are part of the same authorised banking group will only provide single coverage. However, even this might be an exercise in futility if the deposit insurance fund is empty. 'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[2] [1] http://www.fsa.gov.uk/register/firmMainSearch.do http://www.fsa.gov.uk/register/firmMainSearch.do [2] https://news.ycombinator.com/item?id=5435714 https://news.ycombinator.com/item?id=5435714

ghshephard 14y ago

Banks have always been a counterparty risk. To some degree, what's happening in Cyprus is just making that abundantly clear to everyone.

arethuza 14y ago

"it has been considered sacrosanct that deposit holders be protected, no matter the cost" I've never had any such expectation and I don't know anyone who does - banks can (and do) go out of business and generally there is an expectation that in such cases deposits might not be safe (although they are generally insured up to a set amount). If everyone assumed that there money was always safe in a bank then there would never be runs on banks - which seem to have been around as long as banks have.

DangerousPie 14y ago

> the EU urged Cyprus to collectively punish all deposit holders regardless of balance. No it didn't - the EU always wanted Cyprus to leave deposits under 100,000 EUR alone but impose a higher tax on large deposits. The leadership of Cyprus was the one who came up with the tax on lower deposits because they wanted to decrease the burden on high deposits. http://www.bbc.co.uk/news/world-europe-21825981 http://www.bbc.co.uk/news/world-europe-21825981 (last paragraphs)

deleted 14y ago
[deleted]
bitcartel 14y ago
From your link: "The 10bn-euro ($13bn; £8.6bn) bailout agreed with the EU and IMF had demanded that all bank customers pay a one-off levy and led to heavy cash withdrawals." The EU were happy to sign off on a proposal which would see deposits under 100,000 EUR being hit. Maybe it was their idea, maybe it wasn't, but they were okay with it. Ultimately it was the Cypriot parliament who rejected the proposal. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1] [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495
- DangerousPie 14y ago
  My understanding of this article is that the EU told him he would have to come up with ~5bn, which they wanted him to do by imposing a tax on large deposits over 100,000. The comment by Schaeuble is pretty clear in this regard. Instead, the president opted to impose an additional tax on lower deposits in order to decrease the burden on large ones and keep Cyprus attractive as a tax haven. The EU wasn't happy with this but let him do it since it still fulfilled the requirements of raising 5bn. So yes, the EU demanded that SOME customers have to pay SOME levy and I am sure he "shared people's unhappiness" with those terms. But the one who decided to put the burden on the small deposit holders was the Cypriot government.

kalms 14y ago

"... the EU urged Cyprus to collectively punish all deposit holders regardless of balance." Is this true? I feel like citation is needed for that statement. I thought the EU actually wanted to protect the minor deposit holders, as it has been the case all over Europe up until now.

masklinn 14y ago
It's not true at all. All deposits under €100k are insured and protected.
- bitcartel 14y ago
  It is true [1]. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout." The key thing here is that the EU accepted the original proposal, they were okay with seeing deposits of less than €100k being hit, regardless of any deposit guarantee. Public fury resulted in the Cypriot Parliament rejecting the proposal and the EU back-peddling from the original terms. [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495
  - pbreit 14y ago
    They EU might have been "ok" with it but not "happy" as you have suggested elsewhere. The president is obviously biased here.
  - deleted 14y ago
    [deleted]

flexie 14y ago

I worked as a lawyer in another European country for several years and at least once a week I would be contacted by Cypriotic lawyers, accountants and financial advisors who wanted to sell what I would describe as tax evasion schemes to my clients. The thing is that the banking laws of Cyprus permitted funds to be placed with few questions asked and the tax laws of Cyprus were designed to attract foreign companies. Cyprus had a 10 percent corporate tax and an almost 0 percent royalty tax. So the idea was for foreign companies to place their IPR in a Cyprus shell company and license it to their real companies back in Germany, the UK Scandinavia etc. http://www.cyprusprofile.com/documents/uploads/publications/The_Cyprus_new_IP_Regime.PDF http://www.cyprusprofile.com/documents/uploads/publications/... This way Cyprus piggybacked on other European countries for year. Now Cyprus is being rescued by the very countries that let the little island get away with these shenanigans for years. It was the Cyprus government itself that wanted normal depositors to pay the 10 percent tax on deposits because the Cyprus government was afraid of destoying the lucrative tax evasion business. The EU only wanted to levy it on the larger depositors. In the EU there has never been a general convention or social contract that larger deposits are safe. Only deposits up to 100,000 EUR. It is true that during the recent financial crisis larger depositors, bondholders, other creditors and even equity stakes have been saved again and again, but this is the exception, not the normal rule.

seanhandley 14y ago
"let the little island get away with"? You mean "let the bankers on the little island get away with". The banks should be liable and be allowed to fail without bailout and the system should be changed so depositors elect whether their funds are eligible for speculation (and share in any profits and accept any losses therein). The non-speculative accounts should be protected in law and the admin costs of running them maintained by monthly service fees.

masklinn 14y ago

> the EU urged Cyprus to collectively punish all deposit holders regardless of balance. Not only is that incorrect, it's the exact opposite of reality: Cyprus wanted a 10% levy across the board on all accounts, bigger EU countries refused to breach insurance on accounts under €100k, preferring that only uninsured accounts (>100k) be levied against/.

bitcartel 14y ago
In the original proposal from just over a week ago, the EU (and IMF) were quite happy to see deposit holders with under 100,000 EUR being hit. "Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout. Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits. The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1] [1] http://www.bbc.co.uk/news/world-europe-21824495 http://www.bbc.co.uk/news/world-europe-21824495

smackfu 14y ago

Very similar thing happened with a US money market fund a few years ago. They are supposed to be rock solid, always being worth $1 per share and paying out a paltry amount of interest. But safe. So basically, like a bank (but without the FDIC protections). When Lehmann Brothers went down, the Reserve Primary Fund suddenly didn't have enough money to pay out everyone, which had the same effect of "getting in line with the other creditors". They actually had almost all the money, but distributing it took nearly a year IIRC. http://en.wikipedia.org/wiki/Money_market_fund#September_2008 http://en.wikipedia.org/wiki/Money_market_fund#September_200...

Retric 14y ago

Prior to the FDIC american banks had that failed ended generally took there depositors savings with them. Even now people over the FDIC cap have zero actual protection in the US. But, they are also the people that are most politically influential which buys them a lot of under the table deals when the bank is large enough.