# Thoughts on GICs and HISAs after Cyrpus



## generalbrock (Dec 5, 2012)

So I was thinking about some of my asset allocations today after Cyprus decided to seize depositor's money. Like many people on here, I am building an emergency fund in a High Interest Savings Account, and I have also been increasing my GIC ladder lately. I know that we're a fair way off from anything like Cyprus in Canada right now, but I'm wondering if I should move these funds to safer locations in the relatively near future.

It would seem that the depositors in Cyprus would have been safe if instead of savings accounts and their versions of GICs, they had been in bond funds or money market funds. What are everybody's thoughts on switching out of HISAs and GICs and into something safer in case the NDP get in some day and want to dish out some social justice, or the banks get in troubles during some future housing crash.


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## SkyFall (Jun 19, 2012)

Keep it in there, until North America goes back into a recession, if Canadian banks start to fail withdraw EVERYTHING heheheh and aren't we too big too fail now 

http://ca.finance.yahoo.com/news/ca...pital-surcharge-2016-133011006--business.html


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## andrewf (Mar 1, 2010)

It wouldn't happen here. The Government of Canada can always print more Canadian dollars, so has no need to seize deposits. Cypress did not have this luxury.


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## CanadianCapitalist (Mar 31, 2009)

It is worth bearing in mind that our financial system is similar to the US. There have been a number of recent bank failures in the US. Typically what happens when a bank fails is FDIC moves into town over the weekend and on Monday all bank branches open for business as usual. Depositors may not even be aware that the bank was taken over and is under new management.

That's what should have been proposed in Cyprus from the beginning. The initial proposal to ask *all* depositors, even those under insurance limits, to take a haircut was monumentally stupid.

Even if you cannot have faith in deposit insurance, the alternatives come with its own sets of risks. Money in the mattress... could get stolen. Money market funds can lose... recall that many money market funds came close to losing money until the Fed stepped in with guarantees. Bond funds have interest rate risk.


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## OhGreatGuru (May 24, 2009)

Depending on how it measured, the Cyprus banks are reported as having assets of 7 to 9 times the GDP of Cyprus.

Cyprus has a public debt of ~15 Billion euros (84% of GDP).

A Russian billionaire who owns about 10% of one of the Cyprus banks has a personal wealth of about the same amount as this debt.


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## lonewolf (Jun 12, 2012)

Did the fed cause the 1929 crash by raising interest rates to punish the banks that broke away from the fed ?


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## lonewolf (Jun 12, 2012)

Maybe the goverment should get out of controling what is used for money & let the efficeint private sector take over ? No holds bared let survival of the fittest do its job & make the country strong financialy.


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## sags (May 15, 2010)

I wonder if the Cypriot banks will be sharing the list of wealthy tax dodgers to the countries of origin.

They may be on the road to losing a whole lot more than 30% or whatever the number is.

The US is scouring the world to find offshore money wealthy Americans have stuffed away to avoid taxes.

There was an amnesty period......that has expired......and now they are picking them off one at a time.


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## sags (May 15, 2010)

I heard someone on BNN say today that Canadian banks are well capitalized and there is really no need for more capital.........unless something bad happens.

I thought.........well, duh............

Isn't the prospect of "something bad happening" the whole purpose of having adequate capital in the first place.


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## Sampson (Apr 3, 2009)

And where exactly would a safer place be to hold the money? under the mattress.

Remember what happened in Argentina and corralito - no request for donations to keep the country afloat - simple freezing of all bank accounts, followed by severe restrictions on withdrawls.


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## 6811 (Jan 1, 2013)

Sampson said:


> And where exactly would a safer place be to hold the money? under the mattress.
> 
> Remember what happened in Argentina and corralito - no request for donations to keep the country afloat - simple freezing of all bank accounts, followed by severe restrictions on withdrawls.


Diversify, diversify, diversify. If the government fails then we're in real trouble, no matter what.


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## Sampson (Apr 3, 2009)

Do you mean out of the country? or after you reach $100k CDIC limit, move to a different bank. In a crisis, presumably the government would make broad-stroke moves. The only safety would be to hold significant assets outside the country and one would be penalized heavily for this insurance if nothing happened.


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## 6811 (Jan 1, 2013)

Sampson said:


> Do you mean out of the country? or after you reach $100k CDIC limit, move to a different bank. In a crisis, presumably the government would make broad-stroke moves. The only safety would be to hold significant assets outside the country and one would be penalized heavily for this insurance if nothing happened.


Since I am a resident Canadian I personally wouldn't go so far as to diversify (I.E. directly hold significant foreign assets) outside of Canada. All that I am suggesting is that all your eggs should not all be in one basket (or bank). While I admit I don't have any money stashed under my mattress, I do have some CSB's; and an emergency fund in a bank savings account; and a small pension (my wife's); and a Couch Potato portfolio; and a smaller diversified stock portfolio; etc. If all these fail at the same time then we are all in real trouble.


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## Cal (Jun 17, 2009)

It will never happen here. Don't let a newspaper article about another country, with a different financial background, worry you.


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## Nemo2 (Mar 1, 2012)

"He can run, but he can't hide" - Boxer Joe Louis, about opponent Billy Conn, 1941..........we are all Billy Conn's today. :rolleyes2:


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## OptsyEagle (Nov 29, 2009)

Here's the solution for ya.

http://blogs.wsj.com/marketbeat/2013/03/27/the-mattress-safe-cushion-your-pain-in-spain/


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## generalbrock (Dec 5, 2012)

I do love the idea of the mattress/safe or is it a safe mattress...?

But if you look at my original post, I was wondering if they should be switched out to non-bank funds, like bond funds or money market funds.

And if it was confined to the tiny island nation of Cyprus then I wouldn't be worried. But all sorts of countries are floating financial insanity like this. From Britain talking about negative interest rates, to Spain proposing similar, albeit much smaller seizures, long term savings in banks are worrying me. Even in the states, some prominent minds on the left have discussed "taxing" bank accounts.

I'm really just wondering if there any equivalent options, or options with some risk, but perhaps a better return that wouldn't be considered bank desposits. Even if I ever considered switching it out, it would be years from now and the situation would have to be significantly different in Canada. Still, the provinces do have crushing debt and who knows where that will go.....


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## Rusty O'Toole (Feb 1, 2012)

You have nothing to worry about as long as all bankers and politicians are scrupulously honest.


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## MrMatt (Dec 21, 2011)

andrewf said:


> It wouldn't happen here. The Government of Canada can always print more Canadian dollars, so has no need to seize deposits. Cypress did not have this luxury.


Exactly, the important thing about Cyprus is that the money wasn't there.
Basically the "seizure" was just a reconcillation that the money was gone.

Here the government would have stepped in long ago and printed a bit of money if they needed to.
In Cyprus the government didn't step in, and can't print money.


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## Addy (Mar 12, 2010)

What if it ever got so bad money was worth nothing? Gold bars? Jewelry? Vegetables?


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## HaroldCrump (Jun 10, 2009)

MrMatt said:


> Exactly, the important thing about Cyprus is that the money wasn't there.
> Basically the "seizure" was just a reconcillation that the money was gone.
> 
> Here the government would have stepped in long ago and printed a bit of money if they needed to.
> In Cyprus the government didn't step in, and can't print money.


I don't see why this whole thing is being spun as a seizure of deposits.
It is a tax, nothing more and nothing less.

OK, fine, it is a _new_ tax that the residents were not aware of until the day before.
It is a tax that is deducted at source - similar to how income tax is deducted from our paycheques.
We don't call that seizure, do we?

We even have a tax on the interest earned from deposits, but the difference is that such tax is payable upon filing and not deducted at source by the bank.
If it were deducted at source, then it would be seizure as well.

This is simply a tax deducted at source.
Just like our income taxes.

If this is a seizure of private property by the government, well then, so are income taxes.


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## andrewf (Mar 1, 2010)

Harold, one time taxes that are sprung on people and take substantial portions of the thing being taxed is confiscatory taxation. It's like taxing 100% of the value of homes that have Harold Crumps living in them... To call it a tax is just window dressing.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Harold, one time taxes that are sprung on people and take substantial portions of the thing being taxed is confiscatory taxation. It's like taxing 100% of the value of homes that have Harold Crumps living in them... To call it a tax is just window dressing.


I agree about the surprise aspect of this, granted.
The residents had no idea this was coming and had no way of preparing for it (although it is believed some selected Russian oligarchs managed to get some of their money out behind the scenes).

But, such bulk one-time taxation is not entirely unheard of, and is quite routine in other cases.
The US estate tax is a similar one-time significant % tax.
Our own one-time capital gains tax on deemed disposition upon death of an individual is a high %, one-time tax as well.

Sure, there are ways around it, and an individual has the opportunity to plan their affairs in advance.

Also, the Cyprus tax is not a 100% tax, even for the large account holders.

Instead of this shock tax, the govt. could have imposed a 50% "wealth" tax spread over 5 years and implemented capital controls to prevent the flight of capital.
Set bank interest rates to 0% in the meantime.
The net effect would have been almost similar for the account holders, spread over 5 years.

The shock and suddenness of this aside, this is a wealth tax.


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## Nemo2 (Mar 1, 2012)

Addy said:


> What if it ever got so bad money was worth nothing? Gold bars? Jewelry? Vegetables?


If it gets that bad then probably ammunition, and the means of distributing it, either in single shots or short bursts, might be at a premium.


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## andrewf (Mar 1, 2010)

Harold, the Cyprus tax is approaching 100% for large account holders.

I don't think estate taxes or the deemed disposition capital gains at death are quite the same thing as a one time tax. They are permanent fixtures of the tax system, but occur for each taxpayer at most once. As you say, they are known in advance and you have the opportunity to take measures to modulate how much you pay (you can spend it all, give it to charity, etc.). 

This tax is also singularly unfair in that it is not a wealth tax--all other assets were exempt. So the wealthy and connected avoided the brunt of the tax, and retired people who mistakenly put their trust in banks were burned. It is terrible policy, and should make all Eurozone depositors think twice about trusting their governments and their financial system. I can see legitimate cause for keeping only enough for transactions in banks and holding a diversified portfolio of bonds rather than trusting deposits.


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## NorthernRaven (Aug 4, 2010)

It isn't a tax, it is a resolution to a form of bank failure. In the simplest case, if you give money to a bank, the bank is responsible for repaying you. If it goes bust, you become a creditor and get back whatever fraction the banks assets and your position in the creditor queue can provide. Since this can be a rather fraught way to provide basic deposit services, deposit guarantee schemes have been added on top of this. But anything beyond the guarantee is by definition at risk in theory. 

If the Cypress banks are insolvent or at least grossly illiquid, then one alternative would be to let them fail, pay off the guaranteed deposits, and let the rest await the distribution of the liquidated assets. What they are doing is broadly the same thing - unsecured depositors would have been hit in either case.


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## andrewf (Mar 1, 2010)

The problem is that they are making up the law as they go along. This is banana republic behaviour. If they had followed bankruptcy and liquidation proceedings, it would have been different.


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## NorthernRaven (Aug 4, 2010)

Bankruptcy systems generally aren't designed to handle the collapse of most of a country's banking system! Some of that Basel III stuff is designed to provide guidelines and standards for "to big to fail" banks, but everyone is going to be making it up as necessary right now. Ireland, Iceland, the US with TARP, whatever. The main thing with Cyprus is that there wasn't enough cash available from equity/bond/government sources, and the EU wasn't willing to provide the full difference without unsecured depositors being hit (Cyprus had a banking sector that was a high multiple of their GDP).

By the way, Iceland is an interesting case. The government there effectively repudiated liability for the foreign-branch accounts of Icelandic banks; the UK and Dutch governments extended their own guarantee to cover them and went after Iceland for repayment. Iceland didn't, but it sounds like the assets from at least one of the banks is going to eventually pay back a big percentage of its creditors. In theory the Cypriot depositors may eventually get some of their money back as well, depending on just how toxic the books turn out to be.

Ireland, on the other hand, gave a blanket guarantee to their whole banking sector, preserving depositors. They couldn't afford this, of course, but the EU was willing to provide the necessary loans in their case.


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## HaroldCrump (Jun 10, 2009)

NorthernRaven said:


> The main thing with Cyprus is that there wasn't enough cash available from equity/bond/government sources, and the EU wasn't willing to provide the full difference without unsecured depositors being hit (Cyprus had a banking sector that was a high multiple of their GDP).


Yes, 9X times.
There isn't enough money in their entire country to bail out the banks.
Hence, the "bail-in".

Anyhow, to clarify : I wasn't saying this is a good thing or that there is nothing wrong with this type of confiscation.
Desperate situations lead to desperate actions.
I was saying that the one-time excessive taxation the govt. did there is not unprecedented and not _that_ unbelievable.

The US govt. in 1933 effectively confiscated nearly 75% of all individual gold holdings by paying $20 and then re-issuing at $35.
Left to market forces, gold at that time would have been a lot higher than $35 and definitely several multiple times higher than the $20 that citizens were paid.

Annual income tax rates in Canada are now almost 50%, and many European countries are in similar brackets.

Cyprus has had lower tax rates compared to other countries in the Eurozone, such as Germany, France, and the Netherlands.
Non residents had no taxes on deposits, dividends, and capital gains.
They invited trouble for themselves with such policies, combined with out of control fiscal spending.


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## purple.platypus (Dec 10, 2012)

NorthernRaven said:


> It isn't a tax, it is a resolution to a form of bank failure. In the simplest case, if you give money to a bank, the bank is responsible for repaying you. If it goes bust, you become a creditor and get back whatever fraction the banks assets and your position in the creditor queue can provide. Since this can be a rather fraught way to provide basic deposit services, deposit guarantee schemes have been added on top of this. But anything beyond the guarantee is by definition at risk in theory.
> 
> If the Cypress banks are insolvent or at least grossly illiquid, then one alternative would be to let them fail, pay off the guaranteed deposits, and let the rest await the distribution of the liquidated assets. What they are doing is broadly the same thing - unsecured depositors would have been hit in either case.


Sounds good on paper, but as I understand it, one of the main objections to what is happening there is that they aren't respecting the usual seniority rules. In other words, much of what they are seizing _is_ the stuff that's supposed to be guaranteed.


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## NorthernRaven (Aug 4, 2010)

purple.platypus said:


> Sounds good on paper, but as I understand it, one of the main objections to what is happening there is that they aren't respecting the usual seniority rules. In other words, much of what they are seizing _is_ the stuff that's supposed to be guaranteed.


No, they flirted with haircutting the guaranteed deposits (< €100,000), but that's not part of the final plan. I seem to remember something to the effect that there was very little in outstanding bond debt, although I have no idea. My reading of it is that the portions over €100,000 will be partially converted to equity (bank shares), and partially frozen until things are closer to resolution. There's a couple big banks, which have different prospects. Bank of Cyprus sounds like it will continue, and while those shares (37%) people will get may turn out worthless and some of the rest (22%) may get consumed instead of eventually unfrozen, the eventual haircut would range up to around 60%. Laiki Bank sounds worse - people seem to think there will be little or no recovery of uninsured deposits (Laiki accounts < €100,000 will be transferred to Bank of Cyprus).


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## CanadianCapitalist (Mar 31, 2009)

andrewf said:


> The problem is that they are making up the law as they go along. This is banana republic behaviour. If they had followed bankruptcy and liquidation proceedings, it would have been different.


In dealing with large, systemically important banks, you cannot have regular bankruptcy proceedings. A single bank failure (a la Lehman Brothers) sets off a chain reaction that eventually could seize up the entire financial system. But on the other hand, if Governments always bail out these banks through liquidity injections and credit guarantees and even shareholders are not wiped out, it will increase the odds of failures because the banks will take risks that they otherwise won't in the knowledge that someone else will be cleaning up the mess.

The proposals hinted in the Budget aim to formalize a blue print on what to do with systemically important banks such as the big six in Canada. As the condition of a bank worsens, regulators will step in. They will require the bank to shore up capital, which will dilute existing shareholders. If that doesn't work, equity will be wiped out and subordinate securities (all newly issued preferred shares that count towards capital requirements, for example, will have a clause that converts it to equity under certain circumstances). If that still doesn't work, a portion of unsecured debt (which includes uninsured deposits) will convert to common equity. Insured deposits, secured debt and counter parties will not fall under the scope of bail in provisions. 

http://www.bankofcanada.ca/wp-content/uploads/2011/12/fsr-1210-dsouza.pdf

To me, it seems that the bail-in referred to in the budget is good news. It's better to have these protocols in place before stuff hits the fan rather than make up policy in the heat of the moment.


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## purple.platypus (Dec 10, 2012)

NorthernRaven said:


> No, they flirted with haircutting the guaranteed deposits (< €100,000), but that's not part of the final plan. I seem to remember something to the effect that there was very little in outstanding bond debt, although I have no idea.


In that case, my source was either out of date or misinformed. That's not nearly as bad as I thought, then.

I would tack on something to the effect that I still wouldn't like to be in the shoes of their larger depositors, but actually, considering my own financial situation, it occurs to me that I'd be quite happy to trade my problems for theirs!


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## Robillard (Apr 11, 2009)

lonewolf said:


> Did the fed cause the 1929 crash by raising interest rates to punish the banks that broke away from the fed ?


It's my understanding that the 1929 stock market crash was the result of overvalued stocks and excessive leverage, leading to panic selling, i.e., it was the burst of a speculative bubble, not the result of actions by the federal reserve. The subsequent depression (of which the stock market crash was not necessarily a cause) was exacerbated by policymakers though, as they tried to maintain the gold standard. The federal reserve had a to maintain high interest rates in order to prevent an outflow of gold. Many banks failed during the depression for traditional reasons, like losses incurred on mortgages. Deflation was rampant during the depression. So often the collateral backing mortgages became less valuable than the banks' liens. A looser monetary policy might have been helpful under the circumstances, but the Federal Reserve was constrained by the need to maintain the gold standard until 1933.


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## HaroldCrump (Jun 10, 2009)

Robillard said:


> It's my understanding that the 1929 stock market crash was the result of overvalued stocks and excessive leverage, leading to panic selling, i.e., it was the burst of a speculative bubble, not the result of actions by the federal reserve.


Each of those can be caused, or exacerbated, by loose monetary policy.
Low or negative real interest rates lead to excessive leverage.
Low bond yields lead to excessive speculation in equities, real estate, and all other kinds of commodities and markets.

The most recent crisis - the 2008 one - is largely the result of loose monetary policy.
We can blame evil bankers and evil corporations as much as we want, but that behavior was caused, encouraged, and condoned, by a over-accommodative monetary policy (combined with uncontrolled fiscal policy).

The US Fed under Greenspan _wanted_ a bubble, and by gosh, they got the mother of a bubble.


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## purple.platypus (Dec 10, 2012)

In other words, pretty much the exact _opposite _of what Lonewolf said.

(Which matches my understanding too - i.e. to the extent that I understand the relevant economics, which isn't much and should probably be taken with a grain of salt, the answer to Lonewolf's question could not be more emphatically "no".)


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## OhGreatGuru (May 24, 2009)

generalbrock said:


> ...
> It would seem that the depositors in Cyprus would have been safe if instead of savings accounts and their versions of GICs, they had been in bond funds or money market funds. ...


And what kind of bond funds do you think their banks would sell? The Cyprus banks were paying 2-3 times the interest rates in Canada, and paying for it by investing heavily in poor-quality government bonds like those of Greece. With this kind of risk tolerance, if the banks had sold "bond funds" the result for the investor would have been as bad or worse. (The government would have been better off though, since mutual funds are not insured.) The depositors didn't realize it, but indirectly they already were investing in bonds.


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