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Cyprus scenario a warning

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Saturday, April 6, 2013, 9:00 p.m.
 

The aftermath of a seemingly remote banking crisis in Cyprus provides important lessons for people with deposits in American banks. As in much of life, there is a division between the quick and the dead.

In the United States, the Federal Deposit Insurance Corp. (FDIC) insures most bank deposits up to $250,000 per account. In the European Union (EU), until the Cyprus scandal, there was an acceptance of implicit insurance by the European Central Bank (ECB) of each deposit account up to 100,000 euros, or about $130,000.

As proposed by the so-called “troika” of the EU, ECB and the International Monetary Fund (IMF), the initial solution to the Cypriot banking problem shattered the illusion of secure bank deposits. Reflecting German voter angst over a Cyprus bailout and pending elections, Cypriot banks were ordered to seize a percentage of customers' deposits to fund their capital shortfalls. The initiative was defeated in the Cypriot Parliament, however, and the proposed raid on depositors was limited to their deposits above $130,000.

Large amounts of money tend to accrue to smart people who are quick to respond and international in their outlook and ability.

Delayed by political and central bank negotiations, the Cypriot deposit raid took valuable time to enact. Although Cypriot banks were closed, their branches in London and the Uniastrum Bank joint venture in Russia remained open. During this window in February, before the banks were shuttered, large amounts of smart money were withdrawn quickly without restriction.

Foreign investors involved in this electronic bank run withdrew about 18 percent of their money before the banks were closed for reorganization. The run on those banks, however, was not visible like the one on the Bailey Savings & Loan in “It's A Wonderful Life.” It also was not widely reported in the media.

Instead, today's bank runs are executed in seconds by electronic transfer and seen only by banks, central banks and finance ministries. The slower, less attuned depositors in Cyprus found themselves funding much of the depositor burden. Some may experience a loss of funds in excess of $130,000.

Americans may feel relatively secure with insurance of $250,000 per FDIC-insured account. There are $10 trillion in corporate and individual accounts, but the FDIC has cover for only a quarter of 1 percent of that amount — about $25 billion covering 25,000 accounts.

If 25,000 deposit accounts are threatened, no alarm is triggered. But what if millions of accounts are threatened? To many savers, the private, so-called “Bank of Mattress” may appear increasingly attractive, especially at low interest rates.

The electronic veil drawn over Cyprus will be drawn over runs on other problem banks, including any divestitures out of euros and into dollars. As global recession looms larger, investors will be tempted to move to cash, indicating increasing anxiety over fiat money being printed by the Federal Reserve and other central banks.

Americans slow to notice the Cyprus affair should pay increased attention to their bank accounts.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at johnbrowne70@yahoo.com.

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