LESSONS FROM THE CYPRIOT DEPOSIT HAIRCUT FOR EU DEPOSIT INSURANCE SCHEMES

摘要

In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold.An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance. Notably, the operational impossibility of distinguishing between types of deposits for the purposes of creating an equitable deposit insurance scheme reveals something of the unavoidable moral hazard that accompanies these schemes. In addition, a deposit insurance system requires the backing of a strong central bank in order to meet its commitments. These are relevant lessons in the context of current plans to establish a system of EU-wide deposit insurance.