March 17, 2013 Comments

As of late Sunday, it appears that the markets will open down 1% or so due to events in Cyprus whereby depositors in apparently insolvent banks will have to give up about 7 to 10% of their savings deposits in exchange for shares in the banks. (Which shares might or might not be worth anything.). Shock and anger is apparently the reaction from financial commentators. But really, banks have historically been known to be risky ventures. It’s precisely because of that high risk that they generally have some amount of deposit insurance. Bank depositors, especially those in Canada and to a lesser degree the U.S. have forgotten that banks are highly leveraged and therefore risky. There is a ton of misconceptions about events like this. It seems likely that Cypress simply did not have the money to make good on the guarantees (They use the euro and therefore can not simply print money). Presumably the banks were very weak and this was about the best that could be made of a bad situation. Also, apparently much of the money was deposits from outside the country. Do we really need to have all that much sympathy for people who put their money into foreign banks on tiny island countries to earn the extra return or to avoid taxation or whatever?

This could indeed have unintended consequences as bank depositors in other countries may rush to remove cash.

I think this is only a big deal if the financial commentators and traders make it out to be such.

I certainly would not be selling my stocks on this news. Others likely will which could push markets down further.

I will mention though that I had occasion in late November to need about $7000 in cash to make a large purchase (of a shiny object) from Costco. Costco, being the crafty devils they are, would not take a cheque that large. And debit cards only go to $1000 it seems. And I don’t carry American Express. And Costco does not take Visa. I went to TD and tried to withdraw $7000 from my account. They said sure, it will be ready first thing in the morning and the maximum allowed today was $3500. But interestingly I could get $3500 from each of two branches on the dame day, which I did and I made the purchase. It was an interesting learning though. We do trust our money to the banking system and it may not be as accessible as we think. (The fine print states they can require notice to withdraw cash from most accounts).

And early this year I was moving a large amount of money around and I found that about $25,000 was the limit for an electronic transaction. If you had the idea you could instantly scoot a few hundred grand to the Caribbean or someplace on a whim you might find it is not that easy.

I don’t think any of that really needs to be something to worry about. But it was an eye-opener.


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