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2 Apr 2013
Forex Flash: The reason for lack of Cypriot reaction is that it is not unprecedented - BBH
FXstreet.com (Barcelona) - Brown Brothers Harriman analysts believe that one of the reasons why there has not been a stronger reaction to the losses inflicted on the uninsured depositors in Cyprus is because it is not unprecedented.
They note that there is a general procedure for insolvency, where management lose their jobs, shareholders lose, then unsecured creditors, followed by senior credits and finally uninsured depositors all eventually lose. They write, “How deep one has to go depends on several variables, including the capital structure. In effect, there must be enough capital among the shareholders and some (junior) creditors to fully absorb the loss before turning to secured senior creditors and uninsured depositors.” They add that in the US, the most recent example of uninsured depositors being forced to take a loss was with the IndyMac Bank in 2008. Those uninsured depositors lost around half their funds and that was also before the deposit insurance cap was raised to $250 from $100k. They write, “There were obviously serious problems in the US financial system at the time, but the loss suffered by uninsured depositors did not cause them or spark a flight of deposits.”
They note that there is a general procedure for insolvency, where management lose their jobs, shareholders lose, then unsecured creditors, followed by senior credits and finally uninsured depositors all eventually lose. They write, “How deep one has to go depends on several variables, including the capital structure. In effect, there must be enough capital among the shareholders and some (junior) creditors to fully absorb the loss before turning to secured senior creditors and uninsured depositors.” They add that in the US, the most recent example of uninsured depositors being forced to take a loss was with the IndyMac Bank in 2008. Those uninsured depositors lost around half their funds and that was also before the deposit insurance cap was raised to $250 from $100k. They write, “There were obviously serious problems in the US financial system at the time, but the loss suffered by uninsured depositors did not cause them or spark a flight of deposits.”