While the situation in Cyprus is horrible for those who have bank deposits there, it is a useful reminder for American investors of certificates of deposit that deposit insurance limits are just as important as good CD rates.
Depositors in Cyprus' second largest bank, the Cyprus Popular Bank, also known as Laiki, will lose up to 80 percent of any deposits they hold in their accounts in excess of the 100,000 euro deposit-insurance limit in that country, according to a report by Alkman Granitsas of The Wall Street Journal.
It's a little better for depositors at the Bank of Cyprus, who may face "haircuts" of 40 percent, according to the report, which cited an interview with Cyprus Finance Minister Michalis Sarris.
Now, there aren't a lot of real parallels between the banking system of the U.S. and that of Cyprus. According to a 2011 report from the World Bank, Cyprus banks held assets worth nine times the annual gross domestic product of the country. In contrast, assets of U.S. banks amount to less than one year's worth of U.S. GDP. U.S. banks have spent the years since the banking crisis acquiring liquid, safe assets to meet more stringent capital requirements, and all but one just passed a stringent "stress test" put together by the Federal Reserve.
But the point remains that CD investors who carry more than the $250,000 limit, or $500,000 for a joint account, at one bank are exposing themselves to whatever risk that bank is currently carrying.
The Federal Deposit Insurance Corp. is justifiably proud that in the years since its creation, no depositor has lost a dollar's worth of insured deposits, but the key word there is "insured." Should your bank fail and be taken over by the FDIC, your CDs could very well face a haircut similar to what some Cypriots are facing on deposits in excess of the insurance limit there.
What do you think? Has crisis in Cyprus made you more cautious about your bank deposits?
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