It may be a small island country in Europe, but Cyprus’ banking crisis is not an isolated event that will stay within Cyprus’ borders. If it happens, the Cypriot bank’s collapse would affect the global banking system, and eventually you and me. The country’s Parliament recently rejected a bill that would alleviate some of their massive debt. The proposed and rejected bill, which was met by considerable protest by the public, would have imposed a tax on average depositors’ bank accounts and would have raised about $13 billion. The government along with its lenders is currently working on finding the funds elsewhere.
In their new book The Bankers’ New Clothes: What’s Wrong with Banking and What To Do about It, Anat Admati and Martin Hellwig explain why despite the fact that all is seemingly well and sturdy since the 2007 global financial crisis, all is in fact not well and sturdy. In their book they argue that reforms must be made to the banking system or else crisis could happen again- like it seems to be starting in Cyprus. In a recent article on Forbes.com, columnist Karl Whelan explains how Admati and Hellwig provided a solution to the banking problems in this country that should be applied abroad, too:
The idea of having creditors take responsibility for bank losses would work well if governments would listen to Anat Admati and Martin Hellwing who argue in their new book “The Bankers’ New Clothes” that banks should have far more equity funding which would allow them to take big losses and still honor their liabilities. The reality is that policy makers are not listening to Admati and Hellwig and seem unlikely to accept their advice this side of the next banking crisis. Most European banks are highly leveraged and are dangerously exposed to self-fulfilling runs from uninsured creditors. This weekend’s decision increases the likelihood of such runs happening in the not-too-distant future.
Read the full article here.
The Globalist also published an excerpt of the book that reminds us that the global banking sectors are not safe from crisis. It will be interesting to see how the Cyprus situation pans out, and if the banks perk their ears up to what Admati and Hellwig have been saying in their book all along.