9 May 2013
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Quintas Quarterly Economic Review
Deposits
by James McCarthy
 

Recent events in Cyprus have raised concerns over the safety of larger bank deposits in other vulnerable Eurozone countries. When a customer deposits money with a bank they are assuming the bank will lend its money wisely and the economy will be strong enough for bank loans to be repaid. Banks are at risk if loans are not repaid or if customers want to withdraw their deposits faster than the bank can turn its assets into cash. Historically, bank failures and the resulting losses to depositors were a recurring problem. In the United States during 1930, over 1,000 banks failed with losses to depositors. To restore confidence in the banking system the Federal Deposit Insurance Corporation was created which gave depositors insurance which guarantees the safety of their deposits, up to a certain threshold. Similar schemes now exist in most developed countries including Ireland. 

Today many bank customers have tended to regard the risks of depositing money with banks as negligible thanks to a combination of deposit insurance and the willingness of governments to bail out failed banks. In Ireland this happened with AIB in the 1980’s and in 2008 by bailing out the entire banking system. Because the liabilities of the banking sectors in many countries have become so large relative to their economies (e.g. Iceland, Cyprus, Ireland) a guarantee by governments to guarantee all the liabilities in the banking sector is not very real. Recent events in Cyprus saw depositors up to €100,000 being protected, while larger depositors have been left unprotected. Isn’t this how the system should work? Yet there is still much shock at this decision mainly due to the potential knock on effects for other vulnerable Eurozone economies.

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