Thursday, March 28, 2013

No Run on the Bank

Said a Cypriot lady, Maria,
At a bank branch in old Nicosia:
"With the caps they impose
On capital flows,
Withdrawal's a useless idea."

After a two-week bank holiday in Cyprus, during which the fate of the country's banks and depositors (big and small) hung in the balance, the island's financial institutions reopened at noon today, local time. The international news media showed up in force, expecting panicky scenes of massive bank runs. In fact, this did not occur, to the evident surprise of many commentators. Was the surprise warranted?

It has been widely reported, and Cypriot savers were certainly aware, that the end of the bank holiday would bring sharp restrictions on their access to and use of their cash. With the blessing of the European Commission, the government of Cyprus imposed capital controls, "temporarily" restricting the movement of euros out of the country. At branches of the Bank of Cyprus, withdrawals were limited to €300 a day. Under the circumstances, most local customers seem to have reached the reasonable conclusion that there was no point in rushing to take their money. Given the restrictions in place, a run on the bank would be not only irrational, but impossible.

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