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New EU Deal Puts Creditors And Depositors In Failing Banks At Risk

Finance ministers from the European Union reached an agreement early this morning regarding terms for failing banks in the euro region. The new rules are intended to shield taxpayers, who have extended approximately €1.6 trillion in support since the 2008 financial crisis, from saddling the cost of bank bailouts, shifting liability instead to creditors and depositors.

Under the new rules, beginning in 2018, shareholders would assume losses before unsecured creditors and depositors, with exemptions for insured deposits less than €100,000, as well as select individuals and small companies.

A Familiar Precedent

When depositors in Cyprus faced levies up to 10% in late March as a prerequisite for Cypriot banks to receive capital injections from the ECB and IMF, savers in the island nation rushed to their banks, only to find a series of capital controls preventing them from transferring or withdrawing from their accounts.

At the time, Mario Draghi, President of the European Central Bank, assured the world that “Cyprus is no template, Cyprus is no turning point in euro area policy.” As many expected, that would prove untrue in just a matter of months.

As fears grew in other European nations that similar measures may be in store throughout the EU, many concerned citizens looked for a way to hold wealth outside the control of banks which could simply confiscate funds from depositors as needed to maintain solvency. Many of those citizens turned to bitcoin for its ability to be stored securely by its owner and transferred internationally without being stopped by governmental capital controls, resulting in the early-April bitcoin bubble that sent prices up to $260.

cyprus bitcoin impact

Important Differences

While Cyprus in fact was a template for the latest agreement which also puts the holdings of depositors at risk, there are some key differences between the events in March and the rules agreed upon by EU finance ministers this morning.

In addition to investors in the banks’ capital structures shouldering risk ahead of depositors, arguably the largest difference between the latest agreement and the events in Cyprus is the advanced warning depositors now have. Cypriot depositors were told after their money was already frozen, whereas this agreement makes it clear to depositors that their funds may be at risk in the the years ahead if their bank requires a capital injection from eurozone rescue funds.

The new rules still have to be voted into law by the European parliament, which could take several months. Disagreements between Eurozone leaders, particularly in France and Germany, about how to implement such rescue packages may cause difficulty for those hoping to see this finalized soon.

While fundamentally similar, this latest news is unlikely to have the panic-induced impact on bitcoin like the events in Cyprus. Nonetheless, the world just received another stark reminder that dependency on traditional banks to hold wealth leaves the fate of depositors at the will of politically-driven central planners.

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