Cyprus delivered bad news to a lot of good folks who thought their money was safe in banks. Don’t think it can’t happen here, in the U.S. of A. It can, and it probably will. The U.S. and U.K. have jointly developed a resolution plan for insolvent banks. The good news is that the plan is designed to avoid tapping out taxpayers the way Hank Paulson’s emergency $800B TARP did back in 2008. The bad news is that this plan will hit depositors where it hurts.
Bank depositors are in fact unsecured creditors of a corporation. Think about it; you’re loaning money at interest to a business that promises to pay you on demand. If that business goes bust, you lose what you loaned. Federal deposit insurance masks the risk that a depositor will not get back all of their money. I have no problem with depositors taking a hit on sums over and above anything covered by insurance as long as such risk is explained to them in writing when they open a bank account. Plenty of people don’t read the fine print. I do read account fine print, and I also read financial statements to ensure I stay away from troubled banks.
The joint U.S./U.K. plan is designed to wind down parts of troubled banks while preserving other parts that provide vital services to the economy. The goal is to keep thinks like merchant services and check clearing functional while derivatives books are unwound. The impetus for the 2008 mega-bailout was that viable non-bank companies faced the very real chance of getting locked out of short-term credit markets and not being able to pay their vendors. That would have destroyed healthy parts of the economy. No one wants to go through that again. The plan to avoid a repeat of that scenario is now in the public domain and the troika is using parts of it in Cyprus. The experiment so far is proving successful in keeping the economy of Cyprus functioning.