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.

Twitter As a Lesson in Finality

If you’ve written for print, you know about finality. When the final proofs are approved for a book, it really is the that’s-it no-looking-back kind of final. That’s what the public will see. It is the same thing when a newspaper is put to bed. If you don’t write for print, you still might write on Twitter, which is based on a streamlined platform that has some of the same finality. There is no sense in feeling regret when your misspelled words are retweeted — they will have to serve, because it is too late to fix them. But on the other hand, it is good to recognize those moments when you are in no condition to tweet. In Twitter, as in any medium, you can only share the moment you are in, but some moments have more value to offer than others.

After the Cyprus Deal, Two Follow-Up Questions

Analysts and the mainstream media have gradually been coming to realize that there was more to the Cyprus issue than merely striking a deal, and the headlines say those nagging questions were the reason the U.S. stock market declined today. The more immediate question is how Cyprus will prevent an all-out run on one or more of its banks when the banks reopen tomorrow. A few details of currency controls have been announced, but based on what I have heard so far, they seem to be far too loose to keep the banks open. It will not be a big surprise if the Cyprus government or the ECB have to intervene again before the week is over.

Looking forward a few weeks, what will happen to the banks in Europe now that bondholders are no longer too big to fail? That was the big change, remember, from last week to this week, as the EU disowned its previous policy that bondholders had to be protected at all costs. The cost of borrowing for banks will creep upward. Some banks, apparently, are already talking about suspending dividends so that they do not get caught short.

More Tap Water, Less of Everything Else

I heard that soft drink sales are down, an unexplained trend that seems to be about 5 or 10 years behind the same pattern in beer. When I looked into this, though, I found that other beverages are also declining — not coffee, tea, energy drinks, or green drinks, but pretty much everything else: milk, juice, soft drinks, alcoholic beverages, you name it, it’s dropping off pretty much across the board. In the case of milk the declines might be blamed on higher prices rather than declining demand, but as we have seen before, a temporary increase in the price of an already expensive product can change people’s habits and lead to a permanent decline in consumption.

So people are drinking more tap water? That’s what the evidence seems to point to. There is no way to measure the consumption of flowing water as a beverage, though. Drinking is only an incidental use of municipal water, less than 1 percent of the total delivered, so even a drastic change in the amount of water people drink wouldn’t register. Drinking water also comes from wells and springs, and the volume of that water, in general, isn’t measured at all.

I know I have been drinking more water and less of everything else in the last five years or so, but I am as much at a loss to explain the trend in my own style of living as I am when looking at the aggregate trends. I had vague thoughts of saving money and losing weight when I switched to water, and that makes sense. Water is the least expensive zero-calorie beverage out there. It’s logical, but I don’t think that it really explains anything. I have lots of thoughts about improving my health and finances, and most of them don’t lead to long-term action. Water is the beverage of last resort, and perhaps that is a more important factor. Water is easy. It’s what you have when you didn’t plan ahead. People pressed for time are perhaps tiring of the planning and storage that other beverages require.

I think there may be a rejection of the existential emptiness of beverages too. We have long known that soft drinks were nothing more than flavored, sweetened tap water, but somehow now that thought is sinking in. Even orange juice may be mostly tap water — that’s if it says “from concentrate.” It’s that view of beverages that makes people say, “Why bother?” If you are going to drink tap water, you might as well get the real thing, undisguised and undiluted. But that reaction has not caught up to coffee and energy drinks — at least not yet.

For EU, a Psychological Breakthrough

It took all night to reach a deal, and details are thin at this hour, but the EU has dropped its insistence on protecting stockholders and bondholders in the Cyprus megabanks. One will be wound down “immediately,” which I think means without reopening in the interim. The fate of the other may be marked as TBD, to be determined, like so many other details in the plan. The important thing from the point of view of the EU is that the EU has given up whatever leverage it had to force the bank to stay open. If Cyprus finds that the bank is insolvent it will be obliged to close it.

This is a stunning about-face for the EU which as recently as last Sunday was still holding to its insistence that megabanks could not close. It was that stubborn policy that was putting the future of the EU and its member countries in doubt, and backing away from it, even if it continues to say that Cyprus is a special case, has to be considered a psychological breakthrough. Perhaps Europe can change after all.

That said, things will not be easy in Europe. There is no stopping the deposit flight from EU banks that the EU set into motion a week ago. This will hit some banks more than others, but now, at least, there is the possibility that banks that are fundamentally unstable can be wound down.

This weekend showed the EU to be weaker than it appeared even last Friday. Talks went late into the night mainly because it was so hard for the key EU nations to agree among themselves. Germany and France appear to be the key stumbling blocks in the EU, but perhaps that is only because they hold so much influence at this point.

Cyprus, for its part, avoided the broad confiscation of deposits that the EU had put forward a week ago. Insured deposits will be protected. Uninsured deposits in the megabanks, though, will be frozen, apparently available to pay bank debts in Cyprus but not for any other purpose. These deposits will be released only as bank assets are sold to make cash available, likely a ten-year process. With so much doubt about the true market value of many of the assets, it would be hard to make any other arrangement. By the same logic, one hopes that payments to bondholders will be similarly frozen, if they are not actually suspended.

The EU created the financial pressure on Cyprus by creating a crisis in Greece, on which Cyprus so much depends. It then escalated the problems in Cyprus a week ago by insisting on a policy that didn’t make any sense. The EU keeps repeating how small Cyprus is. It is important not for its financial scale, but as a sanity test for the EU. If it cannot make policy that passes the sanity test in one place, how will it make effective policy when it needs to in the heart of the EU?