Markets were shocked when Eurozone Finance Minister Dijsselbloem stated that the plan for uninsured depositors to take losses in Cyprus was a “template” for any future rescues.
Banks were hammered on concerns that uninsured depositors would be pulling out their funds. But the term “uninsured” is there for a reason. Those deposits aren’t meant to have government backing. The real outrage in the Cyprus case is that the initial plan called for insured depositors to take a haircut.
Dijsselbloem’s “template” is in place in the US as well. When the FDIC seeks a buyer for a failed bank but doesn’t succeed, it pays out the insured deposits from its insurance fund. The uninsured portion is not paid out.
But that sum isn’t lost forever. Those deposits are a priority claim, and some portion is likely to be recovered as the bank is resolved. But, in all likelihood, there will be some haircut taken by these depositors — just as in Cyprus.
So even if the timing of Dijsselbloem’s comment was poor, the substance was not. It’s the same reason top officials of the Fed and the SEC are pressing for US money-market-fund reform: Investors are treating assets in the funds as if they are insured, even though they’re not.
It may be smart or dumb to remind the public of this, but the market should absolutely be smart enough to price this fact in.
Sunday, April 7, 2013
Dijsselbloem Shocker Is U.S.’s Template, Too
Posted by Unknown at 10:00 PM