Cyprus ranks third in the Eurozone in terms of the percentage of secured deposits (up to €100,000) in its banking system, marking the size of risk in a potential banking crisis, according to a feature by rating agency DBRS.
According to the report, secured deposits amounted to 75% of the total deposits in the island’s banking system ranking third following fellow bailed out Greece with 79% and Portugal with 77% of total deposits.
Cyprus has the third lowest percentage of unsecured deposits in the Eurozone with 25% again following Greece with 21% and Portugal with 23%. Luxemburg ranks first in the rate of unsecured deposits with 63%.
As a European Deposit Insurance Scheme is still off the table, countries with high insured deposits will be called on to pay deposits below €100,000 through their national deposit insurance scheme in case of a systemic crisis.
DBRS, describes the European Liquidity Backstop, a funding mechanism agreed to in principal at the recent Euro Summit, a positive step toward improving the resolvability of banks, adding however, more is needed to significantly decrease the risk of bank runs in near-to-resolution situations.
According to DBRS, the Single Resolution Fund’s initial potential resources will amount to €55 billion while the SRF’s total potential resources may reach €11 billion.
“The agreement to implement a backstop aims to reduce market stress when a banking crisis hits by providing confidence that the resolution authority has the financial means to stabilise troubled banks,” DBRS said.
However, DBRS noted that even though the SRF will have more financial resources, it will not necessarily be any more likely to use these funds.
As a result, in DBRS’s view, the current framework still does not give full reassurance to creditors, specifically non-covered depositors i.e., depositors not covered by a deposit Guarantee, and therefore which are still exposed to a bail-in, that is, the conversion of deposits to equity.
“Further measures are needed to make depositor bail-in extremely unlikely,” DBRS added.
Measures towards this direction, the agency added, could include increasing the proportion of existing deposits that would be covered by the Deposit Guarantee Schemes by expanding the €100,000 threshold, or by relaxing the tight conditions under which the SRF can provide funds.
Additionally, full depositor preference (i.e., where customer deposits rank above senior debt), which currently is only in place in Italy (from 2019), Greece and Slovenia, would create an extra layer of protection, reducing potential losses in a resolution scenario.
Concluding DBRS pointed out the need for the creation of “a properly designed European Deposit Insurance Scheme could further reduce the risk of bank runs by also reassuring covered depositors that the guarantee will be met even in a systemic crisis.”