Cypress Could Happen in the US; Actually It Happens All the Time
Author : Ari Socolow
Today's news from the EU is that Brussels determined that the Bank of Cypress should be reorganized in a manner leaving its depositors with losses of up to 30% of their deposits over insured amounts, and that the Laiki Bank should be "resolved" in a manner leaving its depositors with losses of up to 70% of deposits over insured amounts. Cypriot law had insured depositors to a Euro 100,000 level so the burden is falling largely on those depositors more wealthy than the average Cypriot, including wealthy and near-wealthy Russians who by many accounts now provide more than half of the deposits to Cypriot banks.
For over a week now, banking commentators have been asking whether Cypress could happen here in the US. When the initial solution in Cypress was to mark down or seize legally insured deposits, the answer was “no.” Now that only deposits over insured limits have been targeted, the answer is not only “yes” but that it happens in the US all the time.
The US of course has a long history, beginning during the Great Depression, of protecting investor deposits through the FDIC and the NCUA which together provide insurance coverage to all bank depositors and most – but not all – credit union depositors up to certain limits.
For the last five years, the FDIC, the NCUA and State regulators have been closing down insolvent U.S. deposit institutions by the dozens. The pace has now slowed dramatically, but there have still been five banks and four credit unions shuttered since the beginning of 2013.
Apparent with each US bank or credit union closure is that there are individuals and couples who continue, even after the US banking crisis, to hold deposits at US financial institutions over FDIC and NCUA insurance limits. To boot, many continue to lose savings by depositing in non-NCUA insured credit unions.
In a sequence dating back to JP Morgan’s “acquisition” of Bear Stearns in early 2008, the FDIC has become very effective at closing banks and transferring all assets, including those over FDIC limits, to acquiring institutions. Hence, many depositors have been saved from losing their deposits over FDIC limits. However, as recently as October 26, 2012, the FDIC closed a bank (Nova Bank in Pennsylvania) without an acquiror, leaving depositors without protection on uninsured deposits.
So the answer is yes, individuals can and do lose deposits over insured limits in the US as well as in Cypress. Depositors in the US are better off because limits are higher and they can spread their money across several accounts, none of which exceeds insurance limits. All but the most wealthy depositors can protect themselves in a matter of minutes by opening numerous online savings accounts and maintaining a spreadsheet.
Cypress should serve as a reminder, even to US depositors, that the rewards of exceeding insured deposit amounts are dramatically outweighed by the risks.