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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.
5 comments:
Since when does a translated blog post count as a working paper?
This is typical of Germans. Inflate publication number by writing many very marginal contributions to the literature (if at all).
If you new German, you would be able to recognize the difference between the German blog and the English paper: even though paper is based on the blog, the blog is much on daily politics, while the article focuses on the meta-level. I decided to generate the English piece to make my insights available to a larger audience.
I would appreciate if such accusation was made under real names.
That 'anonymous' does not reveal her real name let's the reader conclude a lot...
Protection of small savers (not:ordinary savers) is laid down in an EU regulation - that had to be implemented by national authorities. The limit is 100'000 Euros since 2010, but was lower before. In Germany, The insurance is for _all_ deposits held at 'German' banks, nut in foreign banks with a branch in Germany. That means that all deposits in all accounts at different German banks are summed up and then insured up to 100'000. 100'000 is not much when you consider that some parents save more than 100 Euros each month for buying a house, or a car, or to finance the education of their children.
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