Friday, March 29, 2013

The real mistake over Cyprus bailout would be to think it can't happen here

In his Telegraph column, Graeme Archer asks the question of whether depositors living in the UK could find themselves, like Cypriot depositors, suddenly losing their money to bailout the UK banks.

It no longer feels unimaginable that we could wake up one day, and find our interconnected banking system had hit another glitch, cutting us off from “our” money. 
As the European Commission announced on Thursday: “In certain circumstances, the stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest and public policy justifying the imposition of temporary restrictions on capital movements.” 
In other words, a ban on cheques and a limit of 300 euros a day on withdrawals. 
Couldn’t happen here? 
In Britain, where incomes have stagnated, prices have risen, and the workings of the banks remain as opaque as the inner sanctum of that mysterious money-god’s temple? Where those who rely on other people’s money remain in utter denial about the new reality?...  
How can our politics work, when so many voters are affected by the restrictions on public expenditure, restrictions that are required to stave off those supra-national impositions on private expenditure, which would follow failure to get to grips with the problem?... 
would it be more likely, or less, that Britain’s future would resemble Cyprus’s present? [bold added]
As your humble blogger has repeatedly observed, if policymakers and financial regulators are going to use depositor bail-ins to recapitalize the banks, the policymakers and financial regulators must first require the banks to provide ultra transparency.

With each bank's current global asset, liability and off-balance sheet exposure details, depositors have access to the information needed to independently assess the risk and solvency of the banks.

Depositors can do this independent assessment themselves or hire a third party expert to do the assessment for them.  An examples of investors relying on third party experts are mutual fund portfolio managers.

Regardless of who assesses this information, based on this assessment, the depositor can determine how much exposure they want to a bank.

As your humble blogger has repeatedly observe, the global financial system is based off the FDR Framework which combines the philosophy of disclosure with the principle of caveat emptor (buyer beware).

 Simply put, it is only fair if an investor is responsible for all losses on the investment that the investor have access to the all the information needed to make a fully informed decision and can therefore limit their exposure to what they can afford to lose.

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