Bail-Outs, Bail-Ins, and Old Fashioned Failures

The recent drama in the Eurozone and, specifically, Cyprus is worth the commentary of people a lot more skilled in financial analysis than I. Future careers at organizations like the International Monetary Fund will be made by young people just now writing their doctoral these on bank failures.

Because an old-fashioned bank failure is what we're seeing happen to bankers, the investors, and the depositors. It's the fate of the depositors that is grabbing the most attention because plain-old middle class folk are being stuck with the bill. How would you enjoy losing 10 percent of your life savings?

The most important turn in this story is the seizure of deposits; what some have dubbed a "bail-in" instead of a bail-out.

So I invite you, dear reader (and bless you, whoever you are), to take a moment to ponder what happened to bank depositors before the Great Depression. In those hoary old days maybe your bank had private deposit insurance and maybe it didn't. If the bank went under you could very well lose your deposits - maybe your life savings.

Which is why the pictures of long lines of people rushing to take their money out of failing banks in the Depression are so famous. Government deposit insurance came out of that as a comfort check for people to keep their money in the banks instead of precipitating a run on a bank and only making a potential failure into a real failure.

Well, that's what's happening today. Europe has now set the precedent that your deposited money greater than 100,000 Euros is now at risk. You had better understand that risk and the solvency of your bank. Depositor beware.