July 14, 2014
Istanbul, Turkey
It’s been over a year since the banking system in Cyprus officially went bust.
On Friday, March 15, 2013, practically everyone in the country went to bed thinking that everything was just fine.
Many had probably gone to the bank that very day to do business, or logged on to an Internet banking platform.
Yet the very next morning, they woke to a completely new reality: the nation’s banks were broke, and the government was in no position to rescue them.
All the promises they had been told about government guarantees and having a ‘well-regulated’, sound banking system turned out to be lies.
The government proclaimed a bank holiday, and banks remained closed for the next several days. Accounts were frozen and ATM withdrawals were limited to only 100 euros a day.
Eventually the plan materialized: substantial portions of deposits over 100,000 euros would be confiscated in exchange for equity in the banks.
(Just imagine—Bank of America, RBC, or Lloyds takes your money and gives you stock certificates that subsequently plummet in value!)
And for everyone else, severe capital controls were instituted—some of the worst in decades.
After more than a year, some capital controls have been lifted. Though it’s still not possible to transfer money out of Cyprus without the central bank’s approval.
And what does the banking system have to show for sixteen months of capital controls, bailouts, and deposit confiscation?
It turns out that banks in Cyprus are still pitifully capitalized.
The country’s largest bank, the Bank of Cyprus, was at the epicenter of the calamity last year. And they still face a mountain of bad loans.
A staggering 55% of the bank’s loan portfolio is delinquent. And now they’re having to sell stock in order to raise an additional billion euros in capital.
Bear in mind, the shareholder equity for the bank right now is only 2.7 billion to begin with. So they’re having to increase that by a whopping 37%!
Needless to say, this is not something that a healthy bank in a healthy banking system has to do.
Wealth tax next?
There are two key lessons here:
1) Banks and governments will –never– tell you the truth about the system. They will lie all the way through to a full collapse.
2) A banking relationship cannot be taken for granted. It’s important to conduct due diligence, just as you would with any important financial decision.
We’re led to believe that banks are prudent and safe institutions. That they’re insured by the government. That they’re “risk-free”.
Subsequently, most people expend more energy in choosing a brand of toothpaste than in selecting the financial steward who controls their life’s savings.
Remember: this decision doesn’t have to be limited by national borders.
Just as you might move somewhere for more lucrative job opportunities and better schools for your kids, you can also move savings to a place with better financial opportunities and stronger banks.
It’s hard to imagine you’ll be worse off holding some funds at a foreign bank that’s 20 times more liquid and 4 times more solvent than where you bank now.
But if the worst happens and you get Cyprus’d tomorrow morning, it could turn out to be one of the smartest financial decisions you could make.
And unless the past several years have given you 100% confidence in your government and banking institutions, this is an important step I recommend you consider.
