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Comment by arethuza | Hacker News Reader

"You never, ever, ever, hit insured depositors."

The current deal only impacts depositors with more than 100K in the banks - more than this wasn't insured anyway.

"You should basically never hit non-insured depositors either."

Why? Since when is there a guarantee that banks are 100% safe? If people deposit large (i.e. over deposit guarantee limits) in a bank to benefit from the high interest rates they are taking a risk with a reward - if this goes wrong then why should other more prudent people have to bail them out?

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I completely agree. IMHO the real mistake was "just" the initial announcement that included a tax on the insured <100k part of the accounts.

Wasn't that the Cypriot's own idea though - the EU didn't suggest that?

Actually, Schäuble even opposed this idea, but the dear government of Cyprus wanted to avoid disappointing the wealthy investors and hence initially preferred to ignore the insurance commitments it made. Only after the public backslash did they decide to honour at least parts of their previous obligations.

It's unfair to only blame the Cypriot leadership.

"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]

We don't really know which individual came up with the idea... but the EU were okay with the original plan to take money from those with <100k as part of a bailout, as long as the Cypriots got it passed locally as a "tax" to avoid any potential legal issues with the EU directive on protecting deposits.

[1] http://www.bbc.co.uk/news/world-europe-21824495

No, it is completely fair to only blame Cyprus (the people obviously in extension of the leadership), given that Cyprus got itself into this mess and needs European money to find a way out. Expecting them to contribute[0] at least a little bit to the bailout is perfectly fine, and it is not the EU’s job to police how Cyprus procures said contribution.

[0] This is true even more since contrary to Greece or Ireland, there’s no indication whatsoever that Cyprus will ever pay back 10 bn €.

Its not Cyprus to blame for EU's decision to write off the Greek debt about a year ago. Cyprus economy and banking system went from healthy to sinking boat overnight because of that decision of the eurogroup which it didn't have control over. Now the eurogroup came back to penalize Cyprus for not having that money that eurogroup itself took away.

Just 18 months ago, the EU said that Cypriot banks were healthy and had passed EU-wide bank stress tests.

http://www.cyprus-mail.com/cyprus/cyprus-banks-pass-eu-stres...

Many think the bank stress tests are a joke and only exist to raise investor confidence. If true, then those people so quick to criticise Cyprus, might soon find themselves sharing the same fate.

Agreed that no depositor should be hit. The failure here is that of the ECB which has not managed to regulate banks properly to reduce the risks of failure.

Bank regulation is not the responsibility of the ECB. Each EU country is responsible for regulating its own banks. This is one of the criticisms of the EU system: the currency is continent-wide, but there's no centralized bank regulator.

Attempts have been made to establish a common regulator or at least a common set of rules for national regulators, but have been strongly opposed by a few more and more marginalised member countries.

I completely disagree with this idea.

It's trying to avoid avoid reality. What you are saying is that no one should ever be hit. banks shouldn't fail. The reality is that banks do fail. They fail because of bad management. They fail because of bad financial environment. They fail because of bad regulation. Whatever. They do fail. That is reality.

We need rules that define what happens when they do fail. We need to be able to survive bank failures the way we can survive failures of other companies.

We can't just keep deciding that banks should never fail again.

Exactly.

Poorly managed banks should be allowed to fail just like any other business - creative destruction is a vital part of a free market economy.

However, what to do now that "too big to fail" banks are so common?

Case by case.

In Cyprus, I'd say put these banks into some sort of bankruptcy. Give everyone haircuts in whatever order a court (remember rule of law?), not some dark room full of politicians, beuarocrats and bankers decides is correct. Then have the Cypriot government or the EU (we also need to figure out who is liable here) make good on the promises to insured depositors.

I don't see how dooming the next generation of Cypriot taxpayers to high taxes and low public services in order to save uninsured depositors who benefited from the high interest rates these risky accounts yielded from taking a haircut. Not from a legal perspective, or a moral one. It doesn't sit well with socialism or with capitalism.

I don't buy the argument that it will in any way preserve choruses ability to borrow in international markets.

I'm pretty sure that EU has no role in actually providing deposit insurance, it only requires that member states provide deposit insurance.

So what would happen if the Cypriot government couldn't handle the payouts required?

The decision has already been made that 28 banks are too big to fail.

Here is the full list:

http://www.financialstabilityboard.org/publications/r_121031...

If you are management at one of these banks, you essentially have a risk-free business, and can do whatever you want without fear of bankruptcy or prosecution.

http://www.golemxiv.co.uk/2013/03/twilight-of-justice/

Only in Europe could this seem reasonable. This is a horrible precedent and I wonder how much money will move out of EU banks.

So you suggest that the banks should have been allowed to fail and only deposits up to 100K Euro would be guaranteed?

Even if you are prudent and spread your savings across different banks, you might still find yourself one day seeking taxpayer help.

In December 2012, the FDIC and Bank of England published a paper saying:

"deposit guarantee schemes may be required to contribute to the recapitalization of the firm... insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail in should be much lower than in liquidation."[1]

In a nutshell:

"...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."[2]

[1] http://www.bankofengland.co.uk/publications/Documents/news/2...

[2] http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-b...

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