Cyprus drama raises questions

Losses endured by wealthy bank customers in Cyprus have raised questions about the safety of deposits throughout the financial system in the event of a similar crisis.

People wait in a long queue outside a branch of the COOP Bank in Nicosia, Cyprus. All of the country's 26 banks were open from 12pm until 6pm yesterday.

Losses endured by wealthy bank customers in Cyprus have raised questions about the safety of deposits throughout the financial system in the days since the crisis began.
Banks in the Mediterranean island opened yesterday for the first time since the country was forced to accept a tough €10 billion (Dh46.88bn) rescue package to avert bankruptcy.
The deal, struck on Sunday with the European Union, the European Central Bank and the IMF, is the first in the euro zone to impose losses on bank depositors.
Under an agreement to close Laiki Bank, Cyprus's second-largest and most troubled lender, holders of uninsured deposits above €100,000 will lose up to four fifths of their savings. The losses on large deposits in Bank of Cyprus, which will remain in business, could be as much as 40 per cent.
The drama in Cyprus has brought into focus the robusteness of bank deposit protection mechanisms.
European governments vowed this week that the swoop on bank accounts to finance Cyprus's aid package won't set a precedent for future rescues. Still, Cyprus is "a net negative story for peripheral countries," said Luca Jellinek, head of European fixed-income strategy at Credit Agricole CIB in London.
However, analysts stress the chances of contagion spreading to the UAE banking sector are slim.
In a sign of their gathering strength, several banks including First Gulf Bank, Emirates NBD and National Bank of Abu Dhabi have begun repaying Dh70bn of funding supplied to the sector by the Central Bank and the Ministry of Finance in 2008 to prevent a liquidity seizure.
"The fundamentals are different here [in the UAE] and you can see that in the rising residential prices, how credit default swap spreads have come down well below Italy and Spain and how [financial] assets in the banking system here represent only 10 per cent of the size of the banking system in Cyprus," said Jaap Meijer, the head of equity research at Arqaam Capital.
As the global financial crisis began to shake the Emirates in 2008, the Government moved to shore up confidence in the country's banking system by saying it would guarantee domestic banks and their deposits. But analysts are uncertain whether legislation was brought in to back up the pledge.
"My understanding was that deposits were never guaranteed," said Raj Madha, an independent banking analyst in the UAE. "During the crisis, it was announced that legislation would be passed to guarantee deposits, but as far as I know that legislation was never passed."
Nobody was available to comment from the UAE Central Bank.
Lenders in the Emirates have been focusing on writing down bad loans in recent years, building up capital buffers to guard against future shocks and taking a more cautious approach to lending since the bursting of a credit-fuelled property bubble in 2008.
Further security for deposit holders is likely in the coming year. Under the Basel III capital-adequacy rules, which the UAE expects to come into force from the start of next year, all banks in the Emirates are likely to be classified as strategically important to the domestic economy. It means such banks are likely to be bailed out in the event of any trouble, said Mr Meijer.
"Another factor is that recent issued subordinated debt do not have bail-in clauses, making it very unlikely that bond holders would suffer losses in the unlikely case that those banks are stabilised by the Government," he said.