Asset Seizure in Cyprus: Could it Ever Happen in the U.S.?

By

Published March 25, 2013

| FOXBusiness

In a way, some Cypriots were victims of a bank robbery today. Only the heist was pulled off by their government instead of a masked deviant.

As part of a last-minute $13 billion deal with international lenders to prevent the country from financial collapse, deposit-holders with more than 100,000 euros will face big losses. Up to 40% of the assets large depositors, including many Russians, believed they had safely stored in Cypriot banks were seized after the European Union approved the deal.

In the U.S., large investments of more than $250,000 in banks are insured by the Federal Deposit Insurance Corporation. But amid the unrest in Cyprus and our own uneven economic recovery, could the U.S. government ever seize depositors’ assets to avoid a banking collapse?

Very simply, no, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. For starters, the banking structure in the eurozone  is different from U.S. banks. “Even if you have your money in a New York bank [and live in a different state], your deposits are insured by the federal government. In Europe, insurance is on the state level.”

Capital structure is also different in U.S. banks, Chandler says. U.S. banks are also funded through stocks and bonds in addition to deposits, where Cypriot banks rely solely on depositors.

“There hasn’t been a depositor haircut in the U.S. since the Great Depression,” he says. “We are also a currency issuer, and Cyprus is a currency union. We can actually print money here.”

Even Federal Reserve Chairman Ben Bernanke spoke out on Cyprus’ woes last week in a press conference saying the country is facing a “pretty big financial hole” and that it’s "extremely unlikely" such a similar tax on deposits could take place in the U.S. He also noted that the FDIC has never "lost a dime of insured deposits."

Money Market Wildcard

Those with their cash stored in money market accounts may be on edge because these accounts are not federally insured, but Paul Christopher, Wells Fargo chief international strategist, says they can rest assured.

“There is no basis to worry just on what is happening in the eurozone and in Cyprus. The banking differences are quite different. The assets that support money market accounts [in the U.S.] are derived from sources safer than what you have in Cyprus.”

The euro debt crisis in 2010 and 2011 forced U.S. money market accounts to accelerate divesting in Cypriot assets and moved more toward the U.K., Canada and Japan, according to Christopher.

Even during the financial crisis, Chandler says investors did not lose money from their money market account investments because the Federal Reserve stood by the money markets and wouldn’t let them fail.

“They don’t want systematic risk,” Chandler says of the Fed, “and letting money markets accounts fail is systemic risk.”

The only way investors in these accounts actually lose is when returns on deposits are lower than the rate of inflation. “The average American doesn’t have so much money that they are locked up in money markets,” Chandler says. “The average American doesn’t even have that much in savings.”

Lesson Learned?

The situation in Cyprus is an example of what American investors should avoid, says Kim Forrest, vice president and senior analyst at money management firm Fort Pitt Capital.

“These depositors were given ample time knowing that [Cypriot] banks were not solid but they still kept their funds there. Even though FDIC insurance exists, if I had a sketch bank or thought it wasn’t as solid as I imagined, I wouldn’t leave my deposits there.”

Other options for depositors include better-capitalized banks—which aren’t necessarily the largest or the ones advertising the loudest, she says.

“I don’t ever want to have to find out how to get my money back.”

Simply put, Forrest warns you shouldn’t put more than the amount the FDIC insures in one bank. Spread it out throughout several well-capitalized institutions if you can. Smaller businesses can face more risk because their accounts tend to top the $250,000 threshold of being insured by the FDIC, and during the 2008 collapse they were the ones most concerned about the security of U.S. banks.

“If this cash is what you will use for daily living, then don’t mess with it,” Forrest warns. “Don’t try to get yields on it. That is another lesson; Cyprus had better interest rates, so people wanted those returns on their deposits. Anytime you get more return, you are accepting more risk.”

URL

http://www.foxbusiness.com/personal-finance/2013/03/25/cyprus-could-it-happen-here/