Professor Elam

Tuesday March 19 2013

Cyprus Seizes Bank Account Deposits

My campaign of urging students to become more aware of current events appears to be paying off. An alert student sent the above article. I also featured a similar article on The Market Perspective this weekend. 

Here is the story. Cyprus banks hold a lot of marginal Greek bonds and bank loans. So the banks are in danger of being under capitalized. To make up for this, the Cyprus politicians got the bright idea of absconding with ten percent of so of the larger deposits. Why you ask. Because many Russians, not citizens of Cyprus have deposits there. But they took about 6% of smaller, read Cyprus citizen deposits. And of course these individuals are not responsible for the problem. Today the Russian Government  is criticizing the move. 

This is how a run on banks begins. People  lose faith and believe they cannot get their money back. Now many banks there are closed as are the ATMS. When they finally re open there may well be a masss demand for return of deposits. In a fractional banking system, it is of course not possible to return all the deposits as they have been loaned out. And that is how politicians thinking short term arrange to turn a short run problem in to  a long run disaster.