One of the hammering points on Cyprus was that the amount of money on deposit in Cypriot banks was more than the gross domestic product of Cyprus. So if the national banking system collapsed, the banks could not be bailed out.
The bank deposit/GDP ratio for Cyprus was 5 to one.
So, what about the Grand Cayman Islands? In 2011, their banks had 1.6 trillion dollars on deposit. For the same year, their GDP was 2.4 billion dollars. That's one-tenth of the GDP of Vermont and just slightly less than the GDP of Danville, IL.
The bank deposit/GDP ratio for the Grand Caymans is 667 to one.
Yet nobody seems to be worried about the stability of the Grand Cayman Islands.
To be fair, Grand Cayman's debt to GDP ratio is about 25%, while for Cyprus, it was close to 180%. Still, there is no way in this Universe that Grand Cayman can guarantee its deposited funds for more than a quarter-penny on the dollar.
But nobody seems to be worried about their money there.
What am I missing?
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Friday, April 5, 2013
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The Grand Caymans are not part of the European Union and cannot be raped by the Germans. And the Grand Caymans, like Iceland and unlike Ireland, does not in any way guarantee deposits in its banks, thus does not attract deposits that demand such a guarantee. It is the collapse of a guarantee that leads to bank runs and bank collapses, not the lack of a guarantee. If it is made clear up front that there is no guarantee, there are no bank runs caused by that fact.
ReplyDeleteThe problem with Cyprus was that they could no longer pay their Euro-denominated debts, at which point people realized that they could also no longer guarantee deposits in their banks. That sudden removal of an implied subsidy is what caused the bank run that led to capital controls and bank "haircuts. But there is no such implied subsidy for the Grand Caymans, because only an idiot would think the Grand Caymans could guarantee bank balances even if they attempted to make such a promise.
- Badtux the Monetary Value Penguin
Please, bank runs predate deposit insurance. I suspect the benefit of banking in the Caymans has to due with tax avoidance, not high direct returns; they can invest conservatively.
DeleteFrom a banking point of view, bank runs happen when the total of (interest+guarantees) at one bank exceeds the total of (interest+guarantees) at another bank. We will count the tax savings from using the Caymans banks for tax avoidance as interest in this equation, and count both implied and explicit guarantees. The notion that banks like Chase Manhattan are too big to fail and will be bailed out by the Federal government, for example, is an implied guarantee.
DeleteThe utility theory holds that a) money will flow from those banks with a lower total to those banks with a higher total, and b) that if conditions suddenly change, then a bank run will happen.
Let's look at the Great Depression as an example. Most of the banks that failed during the Great Depression had loans backed by land. Under normal conditions this is a high level of guarantee, because if the loan goes sour the bank simply forecloses on the land and sells it at auction to make good. Since at the time a bank was on the hook only for 80% of the value of the land, this meant it was hard for a bank to actually lose money unless it became impossible to sell land for 80% of its value. Which, uhm, is what happened -- crops failed, farmers became unable to pay their loans, banks foreclosed but there was nobody left to buy the land, the implied guarantee of banks being able to sell land for 80% of its value (minimum) collapsed, and the total of (interest+guarantees) collapsed to zero while monetary deflation from the Wall Street crash (which destroyed a significant amount of the effective money supply) made the total of (interest+guarantees) from stuffing your mattress with cash rise to a positive amount. The result: bank runs.
It's all about water flowing downhill, and money flowing uphill, seeking the best return. Capitalism, in other words. My point was that the Grand Caymans have never *had* any guarantees, thus there's no way for guarantees to make any difference in what money goes there. The money that goes there is going there for the high returns caused by tax avoidance, not because of high levels of safety. That money isn't going to leave there as long as the Grand Caymans remain a tax haven because it's already assumed that if a Grand Caymans bank collapses the money will be gone, so only money that is surplus and can tolerate a low guarantee value goes there in the first place.
Which of course also brings up the point that the value of a guarantee varies based on the person doing the depositing. If it's my meager life savings for retirement, I want a high level of guarantee. If I'm a billionaire hiding a few hundred million from the IRS, I don't want it to just evaporate, but eh, if a bank in the Grand Caymans collapses I still have billions elsewhere. But my point was that the Grand Caymans can't get bank runs for the same reason as Cyprus because they can't have the guarantees yanked out from under their banks the way Cyprus did. It was always assumed that the ECB would bail out EU banks if they started going under due to the impact of a banking collapse upon the Euro, and when that guarantee collapses you get Great Depression style bank runs as money flees low (interest+guarantee) in search of higher (interest+guarantee). Just how capitalism works.
Your mixing the concepts of risk and guarantees. What's at the heart of a bank run is adverse change in the risk (real or perceived) of the bank deposits. If assets held by the bank such as property suddenly become worth less, the risk of losings ones deposit goes up. Same for finding that an explicit guarantee of government deposit insurance is no longer valid. (The underlying reason Cyprus's banks are insolvent is they invested heavily in Greek bonds. As part of the Greek bailout, bond holders had to take a haircut.)
DeleteThat sounds right to me. Cypriots are stuck in a tragedy. For the Cayman Islands, I'd be making popcorn.
ReplyDeleteWith or without a guarantee, if you have more than a dollar and a half on deposit with any bank, you want to know what they are doing with your money. It's one thing for a bank to make loans to their brother-in-law in the MoD of a banana republic, it's another to buy treasury notes from the US or maybe Australia. If Australia even needs to borrow any money.
ReplyDelete