Friday, March 29, 2013

This Week in Bank Failures

The combination of currency controls, frozen deposits, armed guards, and TV cameras worked to prevent a mad dash to the banks in Cyprus when they reopened yesterday after a 12-day holiday in the island’s worst banking crisis. There was no reason to rush off to the banks because you wouldn’t get much anyway. Cyprus’s second-largest bank, Cyprus Popular Bank, did not reopen, and at times there were doubts about the other megabank, Bank of Cyprus. It is safe to say that Cyprus will not be quite the offshore banking center it was last year and will have to rebuild its economy. On the other hand, confidence in the EU €100,000 deposit insurance standard was somewhat reinforced by the political maneuvers of the past week.

The handling of the crisis, though, has shaken confidence in the large banks across Europe, all the more so after two top officials hinted publicly that the era of bank bailouts was over and the era of bank liquidations had begun. A generally uniform process for liquidation of large failed banks is planned to be in place in 2015, but the Cyprus Popular Bank liquidation borrowed its core ideas from that future system. There was a two-day stock market sell-off in Europe, reflecting the higher interest rates and larger capital needs that banks in Europe now face.

The news might have been buried by the Cyprus headlines, but a trend toward more vigorous criminal investigations of banks has been palpable this month. Standard Charted Bank was forced to walk back recent comments that sought to disown its admission of guilt in recent settlements of money-laundering offenses. Similarly, in Spain, the discovery of secret derivatives contracts, hidden in a safe and kept secret even from the bank’s accounting staff, is being treated as a possible fraud and coverup. This is the kind of crime that, as I have mentioned before, could easily be prevented by a simple law requiring that all derivatives contracts be registered and published. An increase in legal activity against banks could also be felt in Italy and the United States.

Foreign exchange manipulation by banks is a subject of particular interest in the United States these days. A court hearing on Thursday in a government case against Bank of New York Mellon is an indication of where banks stand with respect to the law. The bank was arguing that Congress meant for banks to be exempt from a law against fraud in currency transactions, even though the statute itself does not say so. The argument in essence boils down to, “Well, obviously, banks are above the law, everyone knows that,” and the judge was not hearing it. Banks’ influence on U.S. law has declined drastically since the period from 1999 to 2004 when they were powerful enough to get laws changed almost at will.

Australia was not particularly involved in the Libor rate-rigging scandal, but it has decided to shut down its current base rate, known as BBSW. BBSW was set in much the same way as Libor, by averaging interest rate reports from banks, but five of the largest banks involved have dropped out of the interest rate panel because of their problems with Libor. A new Australian base rate will be based on tracking actual market transactions.

Last week, the NCUA found a credit union to assume the membership accounts of I.C.E. Federal Credit Union, which it liquidated the week before. Accounts were transferred to Kinecta Federal Credit Union, based in Manhattan Beach, California.