The Cyprus Bail-in Settlement: What It Means
The “what” we refer to here is whether the bail-in process now complete in Cyprus could possibly be applied elsewhere. On June 27th, we saw that it apparently will be in Europe. What about the U.S.?
While we can't say for sure at this point, evidence is growing that it's under consideration. So while they powers-that-be consider, here's something for the rest of us to chew on.
The first step in the bail-in process will be closing of a bank, that is, the government's regulatory authority closing the banks without telling you they’re going to close them. You may think it ridiculous to think such a thing could happen here in the U.S. I know people who are sure it couldn't happen, no matter what. Maybe you're one of them. If so, the following won't matter to you. While I don't lose sleep over this issue (at least at this point), I'm also someone who considers reasonable risks and, if possible, takes measures to protect myself. If you're of that ilk, then consider how things unfolded in Cyprus and use your imagination to see if the possibility exists it could happen in the U.S. To refresh your memory, here's how things played out in Cyprus.
Banks were closed on the weekend, after they were closed for business, without notice. Now note that this is not unique to the Cyprus crisis. Governments have a long history of closing banks without notice, including he U.S. government, which closed all banks in 1933. Of course, this was in the midst of the Great Depression.
Think about it: if a government was going to close its banks, it makes no sense for them to announce the fact, does it? So it goes like this: You go to sleep thinking your money is safe in the bank; you wake up finding you either can’t get to it, or you can only get a limited part of it, or - as in Cyprus - the money has been frozen and you wind up only getting back 47.5% of it at some point.
Knowing how this works, you now have to decide whether the U.S government could conceivably take this sort of action. My own view is that while the possibility at the moment isn’t great, I simply don’t know what sort of shape the banks are really in. Remember that the Fed took a lot of the bad junk the big banks were holding onto it’s own balance sheet back in 2008 - 2009. And you really have no way of knowing exactly how healthy the balance sheets are today. The sort of crisis that caused U.S. banks to close during the Great Depression started with the failure of a bank in Austria. Could the failure of the Cyprus banks play a similar role. I doubt it. But I’m not willing to say either this or some future incident might not cause a chain reaction that could lead to the closing of one or more of our U.S. banks.
I suggest you put some thought into this and, if you’re not convinced that the banks will never ever face a similar situation, take measures to protect yourself.
While we can't say for sure at this point, evidence is growing that it's under consideration. So while they powers-that-be consider, here's something for the rest of us to chew on.
The first step in the bail-in process will be closing of a bank, that is, the government's regulatory authority closing the banks without telling you they’re going to close them. You may think it ridiculous to think such a thing could happen here in the U.S. I know people who are sure it couldn't happen, no matter what. Maybe you're one of them. If so, the following won't matter to you. While I don't lose sleep over this issue (at least at this point), I'm also someone who considers reasonable risks and, if possible, takes measures to protect myself. If you're of that ilk, then consider how things unfolded in Cyprus and use your imagination to see if the possibility exists it could happen in the U.S. To refresh your memory, here's how things played out in Cyprus.
Banks were closed on the weekend, after they were closed for business, without notice. Now note that this is not unique to the Cyprus crisis. Governments have a long history of closing banks without notice, including he U.S. government, which closed all banks in 1933. Of course, this was in the midst of the Great Depression.
Think about it: if a government was going to close its banks, it makes no sense for them to announce the fact, does it? So it goes like this: You go to sleep thinking your money is safe in the bank; you wake up finding you either can’t get to it, or you can only get a limited part of it, or - as in Cyprus - the money has been frozen and you wind up only getting back 47.5% of it at some point.
Knowing how this works, you now have to decide whether the U.S government could conceivably take this sort of action. My own view is that while the possibility at the moment isn’t great, I simply don’t know what sort of shape the banks are really in. Remember that the Fed took a lot of the bad junk the big banks were holding onto it’s own balance sheet back in 2008 - 2009. And you really have no way of knowing exactly how healthy the balance sheets are today. The sort of crisis that caused U.S. banks to close during the Great Depression started with the failure of a bank in Austria. Could the failure of the Cyprus banks play a similar role. I doubt it. But I’m not willing to say either this or some future incident might not cause a chain reaction that could lead to the closing of one or more of our U.S. banks.
I suggest you put some thought into this and, if you’re not convinced that the banks will never ever face a similar situation, take measures to protect yourself.
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