Bank of Cyprus’s Bail-in Blues
Cypriots were understandably livid at the Eurogroup’s decision some 18 months ago to resolve the two largest banks in the country through a so-called bail-in, which involved taking away depositors’ money in order to rescue the ailing banks.
The European Union has already moved a long way towards this through its Bank Recovery and Resolution Directive. The new rule foresees that bail-ins will precede any external bail outs, essentially ensuring that uninsured deposits are up for grabs if a bank fails.
Bailing in a bank transforms the biggest depositors into its biggest shareholders. But turning their deposits into shares doesn’t transform depositors into investors. Investors are betting on the long-term appreciation in the bank’s equity price. Depositors just want their money back.
Cypriots who could see the writing on the wall got their money outside of the country before the bail-in and capital controls were imposed. It’s a great reason why anyone should look to open an offshore bank account in a stable jurisdiction. See here for more on that topic.