Cyprus Bailout Deal Caused Mini Bank Run Across Eurozone: ECB

Cyprus’s controversial bailout in late-March may have caused the level of private bank deposits in most eurozone nations to drop the following month, showed European Central Bank data on Wednesday, reflecting fears among savers in other countries, especially those whose banking sectors were already under stress, that their savings would also take Cyprus-style losses.

Cyprus’s controversial bailout in late-March may have caused the level of private bank deposits in most eurozone nations to drop the following month, showed European Central Bank data on Wednesday, reflecting fears among savers in other countries, especially those whose banking sectors were already under stress, that their savings would also take Cyprus-style losses.

Among the currency union’s 17 members, only banks in France, Germany, Belgium, Austria, Estonia and Slovakia registered inflows in deposits that month, in line with their recent trend; while the biggest drop in absolute terms was in Spain, where deposits fell by more than 23 billion euros, or 1.5 percent.

Not surprisingly, Cyprus saw the biggest drop in savings – private deposits fell by 7.3 percent, or 3.2 billion euros – but the impact was also felt strongly in Greece, where private deposits fell by 2.8 billion euros, or 1.6 percent.

Deposits in Slovenian banks fell by 1.9 percent, while Italy, Portugal and the Netherlands saw a drop of slightly less than 1 percent each.

Malta and Luxembourg, two small countries that have been compared with Cyprus due to their outsize financial sectors, fared better. Only 0.3 percent of private deposits left Maltese banks, while Luxembourg’s lenders lost 0.6 percent.

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[quote]”The eurozone’s risky Cyprus bail-out may have at least temporarily hurt trust in the banking systems in other peripheral countries,” said Berenberg Bank economist Christian Schulz to AFP.[/quote]

The drop in deposits in April broke a positive trend that had begun to emerge last autumn after the ECB announced its OMT bond purchase programme, Schulz noted.

Nonetheless, Schulz agreed with the ECB that the mini-bank run had been relatively “muted”, thanks largely to the bank’s efforts to backstop government debt markets and relieve bank funding pressures.

“The broader financial market reaction since late March suggests that any contagion from the Cyprus bank restructuring and Italy’s political turmoil has faded,” Schulz said.

[quote]”The ECB’s rescue shield has proved its resilience and the gradual healing of the financial system should resume. But to accelerate the end of the recession, eurozone policy makers should do more to improve confidence and ease credit access for small firms in the reform countries,” he added.[/quote]

In its half-yearly assessment of the euro zone’s financial sector, the ECB also said that the financial sector’s condition in the eurozone was the best it had been in the last two years.

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“Financial stability has improved but remains fragile … due to weak growth and banking sector vulnerabilities,” ECB Vice President Vitor Constancio told reporters on Wednesday, as cited by Reuters.

[quote]”There is this disconnect between the significant improvements in financial markets in general and the real economy – and the situation in the real economy is affecting bank…So this is a cause of concern,” he said.[/quote]