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Stop Worrying, Cyprus Has Already Happened in America

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Point. Gasp. Shake your head in disgust.

The world learned two weeks ago that yet another European country is in desperate need of a bailout. The two largest banks in Cyprus, a tiny Mediterranean island situated between Turkey and Lebanon, have been struggling to deal with losses incurred from the writedown of Greek bonds. But, as is well-known by now, to unlock the 10 billion euro bailout offered by the "troika" -- the International Monetary Fund, European Union, and European Central Bank -- Cyprus must come up with somewhere north of five billion euros on its own. And to do this, it's decided to place a levy on uninsured bank deposits.

The island nation's central bank outlined the details of the program on Sunday. Depositors in Cyprus' largest lender will have 37.5% of their deposits above 100,000 euros converted into bank equity -- which presumably will be rendered worthless once the losses are fully absorbed. An additional 22.5% will be "temporarily withheld to ensure the lender meets the terms of its recapitalization." And the remaining 40% will be "temporarily frozen to ensure the lender's liquidity." Taken together, a full 60% of deposits in excess of 100,000 euros have thus begun the ascent to money heaven.

Since the crisis erupted into plain view over the weekend of March 16-17, analysts and commentators have fretted and warned that the same thing could happen in the United States. In the upcoming issue of Forbes, the eponymous Steve Forbes quips, "Don't put it past our politicians to try it in a financial emergency." The conservative firebrand Rush Limbaugh said it's a "legitimate fear to have." And a "news commentator" even went so far as to proclaim, "not only can it happen here, it is happening here."

While I'd like to say that opinions like this are wrong, the reality is that the loss of deposits isn't a completely foreign concept. A pertinent example of this was the FDIC-backed bailout of IndyMac Bancorp five years ago. As The New York Times recently noted, "IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss -- 50 percent on deposits above the levels insured by the [FDIC]."

At the same time, there are two important distinctions that are worth keeping in mind. First, since the IndyMac bailout, the FDIC has raised its deposit insurance to $250,000, or more than twice the $100,000 limit before the crisis. And second, thanks to a heighted regulatory and capital regime, banks here have become increasingly (albeit involuntarily) risk averse -- the JPMorgan Chase (NYSE: JPM  ) London Whale scandal being a notable exception to this.

Take the capital base of the nation's largest banks. The Tier 1 capital ratio at Bank of America (NYSE: BAC  ) went from 6.9% of total assets at the end of 2007 to 12.9% at the end of last year. Over this same time period, Citigroup's (NYSE: C  ) ratcheted up from 7.1% to 14.1%, Wells Fargo's (NYSE: WFC  ) from 7.6% to 11.8%, and U.S. Bancorp (NYSE: USB  ) from 8.3% to 10.8%. According to JPMorgan's obviously biased CEO Jamie Dimon, "I think all banks will have too much capital in two and a half years. And they're not going to know what to do with it."

The lesson to take from this is simple. Are uninsured deposits always at risk? Yes -- though, to reemphasize the point, this only applies to deposits in excess of $250,000 at each institution. But should you be concerned given the precedent set by Cyprus? No -- at least no more so than you were before, as banks in the United States are arguably safer now than they've been for decades.

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Read/Post Comments (8) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2013, at 5:12 PM, rdmcdonald48 wrote:

    What American's don't see happening to them seems not to be of any real interest to them until someone points it out. By then, it's too late for them to do anything but whine and moan.

    We need to seriously consider a "New" Continental Congress and the reformation of this government by restricting its, and the Presidents, power to encumber debt upon the public as they have. For decades this has been going on, and even "fools" have watched it happen. "As long as it's not me, I am not hurt by it"! Well, now it is you, and everyone else, even those who haven't been, and won't be, born yet.

    It's time for a sweeping change, just as the Founders provided it for us to be able to do.

    38 Governors is all it takes to do it, with the support of their state citizens.

  • Report this Comment On April 01, 2013, at 5:28 PM, growlandw wrote:

    How is it that a country with the GDP of Milwaukee could crash the eurozone and roil the States?

  • Report this Comment On April 01, 2013, at 5:44 PM, Jesusa2000 wrote:

    "And second, thanks to a heighted regulatory and capital regime, banks here have become increasingly (albeit involuntarily) risk averse -- the JPMorgan Chase."

    HA HA HA HA HA HA HA HA HA HA HA HA HA HA! Thanks for the lulz, dude. I don't know what's worse if the fact that someone can actually say that with a straight face or the fact that there are people stupid enough to believe it.

  • Report this Comment On April 01, 2013, at 8:05 PM, danno228 wrote:

    Hi John. Don't be to sure it won't happen here again. Maybe you should bury your money in the back yard before it's too late. Good luck.

  • Report this Comment On April 01, 2013, at 8:22 PM, dakin22 wrote:

    fortunately ya'll keep running in this giant rat race unawares you are enslaved by something completely unrealistic and made up known as money. capitalism is always bound to fail. why is it 3 percent of the population owns 70 percent or more of the worlds money

  • Report this Comment On April 01, 2013, at 9:46 PM, penerchoner1776 wrote:

    Do away with federal reserve, balance the budget and have a 2 or 3 or 4 party system instead of the 1 party system we now have!

  • Report this Comment On April 02, 2013, at 1:01 AM, dazle10 wrote:

    its been happening here for years people! Here they just inflate the currency and steal the value of all dollars. Our currency is worth 5 % of what it used to be. In Cyprus they are on the Euro so Cyprus cant just print more so they had to steal it directly, Alot more 'honest ' way to do it, Here they steal our money with subterfuge.

  • Report this Comment On April 02, 2013, at 7:06 AM, RobertStuart wrote:

    Ben Bernanke's QE1,2 & 3 policies to just print America's way out of debt if those newly printed bucks are invested in a bloated stock market is a wiser course and a more ethical course than a government just declaring it needs money and seizing the assets in bank accounts ala Cyprus? I lose either way as do most Americans. I feel like the frog being slowly boiled to death -- doesn't feel the heat until he's dead. Still dead of course just done in a manner that is not so frightening.

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