The deposit insurance system of Cyprus has become obsolete

In response to the request of, István Tóth, PR&IR Manager of the National Deposit Insurance Fund (NDIF) has described in detail the deposit insurance system of Cyprus and provided information on the common talk on deposit insurance in Europe.

With the relevant directive Brussels carved the protection of deposits under EUR 100,000 in stone. With the directive the EU promises that European citizens’ bank deposits worth maximum EUR 100,000 are sacrosanct irrespective of the depositors’ nationality. Therefore, neither the Cyprian banks, nor the credibility of the EU benefited from the idea of a standard surtax coming especially from this direction (Brussels). One of the lessons of the crisis is that any thought or idea travels around the world and reaches the people concerned within an hour, even if they speak other languages. In addition, it demonstrates a nation-state approach if the decision-makers believe that the citizens of their own countries will not react to the brainstorming held in relation to Cyprus, just because it is geographically far away. Today distances exist neither within the banking system of the EU, nor between bank customers. Therefore, it is extremely important that both Brussels and Cyprus confirmed the existence and intangibility of deposits up to EUR 100,000, István Tóth announced.

The analysis of the abilities of deposit insurance in Cyprus may raise the concern that behind the systemic problem currently unfolding even an individual bank crisis would be difficult to manage without affecting the credibility of regulators, which will hit the banks after all. In the newly changed world deposit insurers can fulfil their function, i.e. strengthen confidence in the system only if they operate on customer-friendly and market-conform foundations at the same time. If a customer has already got used to a certain level of customer service by a bank, the deposit insurer must provide services at the same standard, even if it has not had any indemnification case for ten years. A queue of hundreds and thousands of people waiting for their own money is not considered as evidence of said standards, although currently deposit insurance in Cyprus is based on this. Due to unrealised developments and the low tolerance level of depositors it is now the vested interest of all that no indemnification should have to be paid to depositors in Cyprus within the foreseeable future, not even in connection with a small cooperative, István Tóth added. In the gloomy market conditions caused by the unfolding events an inadequately working deposit insurance system will further aggravate the situation.

In parallel with the reconsideration of the market operations of the service suppliers as well as of the regulatory environment the deposit insurance system must also be modernised on a continuous basis. We are constantly improving the protection of our computers against viruses, we have installed defibrillators in each bank branch, and everybody acknowledges that deposit insurance abilities must be maintained with the same approach. “It is not enough to adopt a regulation on protection and then lean back,” István Tóth said. Since the development of the insurance system has not been carried out, if crisis hits, it is already too late to act. It is hardly probable that the failed supplier can be quickly removed from the market, and it is hardly possible to maintain the depositors’ confidence if they are put to work for their own money.

The customer-friendly operation and rapid response ability of the deposit insurer have come to the forefront since 2008, especially in the light of the fact that the EU is planning to further shorten the current process of indemnification of 20 working days irrespective of the size and number of customers of the organisation that gets into trouble. The Commission wants to have an extremely short deadline, i.e. seven working days. The compromise may be 15 days, but no matter whichever deadline is included in the directive, deposit insurers will have to be able to give evidence of better implementation skills than they currently possess. Currently it is only the British FSCS, and in last year’s Soltvadkert case it was the National Deposit Insurance Fund of Hungary that was able to indemnify several thousands of customers within 10 working days in an acute situation. Yet, we cannot stop our development efforts: the Brits too have aimed to be able to indemnify customers within seven days. Bank bankruptcies have always happened, and the goal is to make the customer suffer the consequences as little as possible.