Cyprus bail-in

The eurozone's first depositor bail-in. Nearly half of every euro above the insured limit became shares in the bank that lost it.

The world stops matching the model. Regime change and leverage turn a small error fatal.

Room: Q4 Where models die
Year: 2013
Impact: 47.5%
Sector: Banking
Region: Europe
Category: Economic

Why this room

Cyprus sits in the Where-models-die quadrant because the loss was not produced by a mispriced position but by the withdrawal of two assumptions the entire system had been built on: that euro-area sovereign debt was risk-free, and that bank deposits were inviolable. The Greek PSI writedown removed the first, destroying the capital of Cypriot banks that had concentrated in Greek government bonds. The second was then removed by the resolution itself. Leverage and scale did the rest: with a banking sector several multiples of national GDP, no domestic fiscal backstop could absorb the hole, so the loss was forced onto a creditor class - uninsured depositors - that had never been priced as risk-bearing. The regime change, not the original error, is what made the outcome fatal.

The record

Laiki Bank (Cyprus Popular Bank) was RESOLVED, split into a good bank and a bad bank; its uninsured depositors were left in the legacy entity and ultimately recovered roughly 6 cents per euro as its assets were liquidated.medium
Bank of Cyprus was RECAPITALISED rather than resolved: uninsured deposits above EUR 100,000 were converted into equity. An initial 37.5% was converted with a further tranche frozen pending assessment; the Central Bank of Cyprus set the final figure at 47.5%, with conversion completed on 30 July 2013.high
Deposits at or below EUR 100,000 were protected in full, in line with the EU deposit guarantee; the bail-in raised approximately EUR 5.8 billion from private creditors.high
The official programme agreed on 25 March 2013 was up to EUR 10 billion, with the ESM providing up to EUR 9 billion and the IMF around EUR 1 billion; in the event the ESM disbursed only EUR 6.3 billion before Cyprus exited the programme on 31 March 2016.certain
Approximately EUR 9 billion of Emergency Liquidity Assistance was rolled over from Laiki to Bank of Cyprus, and capital controls imposed in spring 2013 were not fully lifted until April 2015.medium

Sources

The book

This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.

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