The banking crisis in Cyprus has been handled very poorly, few would disagree. There was foremost a deplorable approach to naming things, for example "deposit tax," and also the fact that it took so long to come to a solution, which allowed privileged people to escape losses imposed on others. However, one idea that I found rather strange was the concept that the "ordinary saver" should not be penalized.
Justina Fischer, in a paper whose length rivals this blog post, argues that ordinary savers need extra protection because they have fewer choices in savings vehicles and they may be suffering from information asymmetries. But who are the ordinary savers? Are these people with little savings? Those with undiversified savings? If household finance data taught us something, it is that there is extraordinary diversity in savings and wealth, and that the life cycle matters a lot. So it impossible to easily categorize people as ordinary by simply looking at their savings account.
That said, a deposit account bears risk and it is not a sacred cow that the government or someone else should insure at any cost. During the liquidation of a bank, depositors may be defined to be the first to be served (which is not even true in some countries, for example in the US holders of derivatives are first), but that does not mean that there is necessarily enough for them. That said, a country may decide to insure deposits up to an amount, and many do. But this is part of a financial contract that a country may not even be able to hold, as the Cypriot example shows us. And if we think a bit harder about it, this insurance should not apply to the account but to the person, like guaranteeing everyone that the first X euros in bank deposits anywhere cannot be taken in a bank bankruptcy. But anything above that is subject to usual bankruptcy proceedings.
Justina Fischer, in a paper whose length rivals this blog post, argues that ordinary savers need extra protection because they have fewer choices in savings vehicles and they may be suffering from information asymmetries. But who are the ordinary savers? Are these people with little savings? Those with undiversified savings? If household finance data taught us something, it is that there is extraordinary diversity in savings and wealth, and that the life cycle matters a lot. So it impossible to easily categorize people as ordinary by simply looking at their savings account.
That said, a deposit account bears risk and it is not a sacred cow that the government or someone else should insure at any cost. During the liquidation of a bank, depositors may be defined to be the first to be served (which is not even true in some countries, for example in the US holders of derivatives are first), but that does not mean that there is necessarily enough for them. That said, a country may decide to insure deposits up to an amount, and many do. But this is part of a financial contract that a country may not even be able to hold, as the Cypriot example shows us. And if we think a bit harder about it, this insurance should not apply to the account but to the person, like guaranteeing everyone that the first X euros in bank deposits anywhere cannot be taken in a bank bankruptcy. But anything above that is subject to usual bankruptcy proceedings.
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