Lessons from the Cypriot Deposit Haircut for EU Deposit Insurance Schemes
In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banksâ€™ dual operations and of the relationship between two types of depositsâ€”deposits of customersâ€™ currency and coin, and deposit accounts created by bank loansâ€”helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance.
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