Bank Deposit Confiscation and the Lessons from the 2013 Cyprus Crisis

Sovereign Man Simon Black has a wonderful recollection of the events that led to the 2012-2013 Cyprus crisis and the ensuing bail-in or deposit confiscation, technically named as “bank deposit levy”

Mr. Black writes: (bold original)

It was almost exactly one year ago to the day that an entire nation was frozen out of its savings… overnight.

Cypriots went to bed on Friday thinking everything was fine. By the next morning, they had no way to pay bills or buy food.

It’s certainly a chilling reminder of how quickly things can change. And why.

The entire crisis sprang from a mountain of debt. The government had accumulated too much debt. The banking system had accumulated too much debt.

And banks had lost a lot of their customers’ money making risky, stupid bets on things like Greek government bonds.

By March 2013, Cypriot banks were almost entirely devoid of cash.

Sure, customers could log on to a website and check their bank balances.

But there’s a huge difference between a number displayed on a screen, and a well-capitalized bank that actually holds abundant cash.

The government was too insolvent to bail anyone out. And as a member of the eurozone, Cyprus didn’t have the ability to print its own money.

So they did the only thing they could think of– confiscate customer deposits.

And they imposed capital controls on top of that to make sure that people couldn’t withdraw their remaining funds out of the banks as soon as the freeze was lifted.

It was a truly despicable act. But again, even though it all unfolded overnight, the warning signs were building for at least a year. Especially the debt.

Having escaped the Euro-crisis, Cypriot officials developed a sense of severe overconfidence. They bragged about having passed the Eurozone banking stress test, and even received numerous accolades for the so-called excellence in banking management. Yet officials hardly recognized the excessive risks that their financial system was absorbing until the system broke. This looked very much like a classic sign of a pre-crisis mania.

So hindsight is 20-20. The point is that bad things (crisis) don’t just happen. Financial crises are outcomes of a process. These occur or surface when the accretion of imbalances hit a ‘tipping point’ or a ‘critical mass’. 

During boom days, rising asset prices hardly assumes away the risks involved. To the contrary, rising prices when funded by “a mountain of debt” are symptoms of acute overconfidence that have been masking the buildup of risks.

And the worst part is that governments have been “innovating” by the employment of a larger form of dragnet to capture the private sector’s resources…in the case of Cyprus—deposit bail in or confiscation.

And one year after the bail-in, Cyprus has still been mired in an economic depression

Despite the stock market boom, Mr. Black goes to warn about the mounting risks in the US…

When countries, central banks, and commercial banks accumulate too much debt, and specifically too much debt relative to assets, you can be certain there is trouble ahead in the system.

Think about it like your own personal finances. If you have a million dollars in debt, that seems like a lot. But if you own a home worth $5 million, you are still in good shape financially.

If, on the other hand, you have a million dollar mortgage for a home that’s worth $250,000, you’re in deep trouble.

The US government’s official, ‘on the books’ debt now exceeds $17.5 trillion. This is an enormous figure.

If the Uncle Sam just happened to have $20 trillion or so laying around, however, this debt load wouldn’t be a big deal. But that’s not the case.

By the US government’s own admission, their own financial statements show net equity (assets minus liabilities) of MINUS $16.9 trillion.

That’s including ALL the assets: Every tank. Every bullet. Every body scanner. Every highway.

Then you have to look at the Central Bank, which is itself teetering on insolvency.

The Federal Reserve’s balance sheet has exploded since 2008, and right now the Fed’s net equity (assets minus liabilities) is about $56 billion.

That’s a razor-thin 1.34% of its $4 trillion in assets (it was 4.5% before the crisis).

Here’s the thing: in its own annual report, the Fed just admitted that it had accumulated ‘unrealized losses’ totaling $53 billion. This is almost the Fed’s ENTIRE EQUITY.

So in the Land of the Free, you now have an insolvent government and insolvent central bank underpinning a commercial banking system that is incentivized to make risky, stupid bets with their customers’ money.

To be fair, I’m not suggesting that bank accounts in the US are going to be frozen tomorrow morning.

But a rational person should recognize that the warning signs are very similar to what they were in Cyprus last year.

As for rational people they seem to headed towards extinction, as more and more people are being sucked into the financial market "Truman Show"

Yet the lessons of the Cyprus Crisis of 2013 should not be seen only in the context of the US but is as relevant to other nations, whether China, Japan, ASEAN or the Philippines.

Since the baptism of the bail-in experiment, a growing number of governments have indicated their willingness to use the Cyprus model. This means that once the boom morphs into a bust via the “Black Swan” or Wile E. Coyote moment, the Cyprus model may just become a standard form of government response.

These are writings on the wall.