Monday, March 18, 2013

There’d have been no problem in Cyprus under full reserve banking.

I’m rapidly losing count of the number of banking problems solved by full reserve banking. Cyprus is just one.
Tomorrow, I’ll deal with another, which has to do with building societies (“savings and loan” in the US).  It’s the fact that in relation to building societies,  Mervyn King can’t work out “how you ensure that there is an adequate loss-absorbing capacity before the depositors are called upon to bear losses…”.  (See question 4510 here).
Anyway . . . Cyprus.
Under full reserve, depositors have to chose between on the one hand having their money loaned or invested, and on the other hand, having their money lodged in a 100% safe manner.
The former means depositors get interest, but they take a hair cut if the loans / investments into which they’ve chosen to put their money go wrong. Plus they don’t have instant access to their money.
Under the latter, or “safe” option, depositors do have instant access. But they get no interest. But then they get no interest on current or checking accounts anyway at the moment, so that’s no big problem. Plus their money is state guaranteed.
However, there is no real taxpayer exposure under the safe option because the money is virtually 100% safe anyway.
So in the case of Cyprus, depositors who really wanted 100% safety wouldn’t have lost any money. As to those who chose to have their money loaned on to dodgy borrowers in Greece (which is where much of the money loaned by Cypriot banks went) they WOULD HAVE had a hair cut. But that would have been no more than they signed up for when originally lodging their money.
So there’d have been no panic. No politicians running around like headless chickens. No threats of mass withdrawals from banks in other periphery countries.
I mean if a system can solve the problems in the latter paragraph, plus I don’t know how many other banking problems, that makes it to banking what the theory of relativity is to physics, doesn’t it?

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