The
Cyprus Claw Back:
Could
It Happen Here?
'Claw
backs’ like those seen in Cyprus unlikely in America, FDIC says
18
March, 2013
The
federal agency that insures bank deposits says it does not have the
authority to seize deposits to stabilize failing banks, though
finance experts warn the agency can impose losses on large depositors
through other means.
The
issue has come to the forefront due to a measure proposed by the
government of Cyprus that would impose a one-time tax on all deposits
in the country’s ailing banks.
The
proposal is intended to stabilize the Cypriot banking sector, which
has been exposed to major losses due to the southern European
nation’s proximity to Greece.
The
measure would “claw back” 6.7 percent of deposits under 100,000
euros ($130,000) and 9.9 percent of deposits above that threshold,
using the revenue to stabilize failing banks’ balance sheets.
American
officials say the Federal Deposit Insurance Corporation (FDIC), which
regulates and insures American bank deposits, does not have the
authority under current law to undertake a measure as radical as the
one proposed in Cyprus.
“There
is no way [the FDIC could implement similar measures to backstop the
American banking sector],” said agency spokesman Greg Hernandez.
“The FDIC does not claw back any insured deposits.”
He
added that banks typically take on the entirety of deposits of
financial institutions they merge with or purchase.
“In
a whole bank transaction, the acquiring institution of the failed
bank will assume all deposits no matter if they are above the deposit
insurance limit,” Hernandez said.
The
2008 Troubled Asset Relief Program temporarily increased the deposit
insurance threshold from $100,000 to $250,000; the Dodd-Frank
financial regulation package made that increase permanent.
If
a failed bank’s acquiring entity does not accept deposits above the
insurance threshold, those depositors become creditors of the FDIC,
Hernandez said.
In
that case, he explained, “the FDIC will then make payments to
depositors who are owed money that had been above the insurance
limit.”
However,
some financial experts warned that the FDIC can still take steps that
leave some bank depositors out in the cold.
“The
FDIC usually creates a merger of the failed bank, so all depositors
are covered, but there have been cases where losses were taken by
large depositors,” said Alex Pollock, a resident fellow at the
American Enterprise Institute and former president and CEO of the
Federal Home Loan Bank of Chicago.
Pollack
noted two examples: Oklahoma City-based Penn Square Bank, which,
legal scholars noted was “the largest bank failure in the FDIC’s
history in which uninsured depositors suffered losses”; and IndyMac
Bank, whose uninsured depositors were given dividends equal to half
of their uninsured deposits.
John
Berlau, senior fellow for finance and access to capital and the
Competitive Enterprise Institute, noted that while FDIC cannot claw
back deposits, it “has the authority to seize banks and ‘impose
losses’” on uninsured depositors.
“Arbitrarily
‘imposing losses’ can be similar to claw backs,” Berlau said.
The
American banking sector sought to reassure depositors on Monday in
the face of potential bank-runs in Cyprus.
“Simply
put, U.S. insured depositors are safe and their deposits are
protected by a strong FDIC fund, a financially secure banking system
and the full faith and credit of the U.S. government,” James
Chessen, chief economist for the American Bankers Association, told
the Hill.
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