After Cyprus, Who Is Next?

Tyler Durden's picture

Short answer: we don't know.

We do, however, know something we have been pointing out since early 2012 - when it comes to the funding structure of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans.

Extending the above to cover the entire US financial system, shows more of the same: according to the Fed, in the latest week ended March 6, there was a total of $9,283 billion in consolidated deposits, covering just $7,255 billion in commercial bank loans, a record $2+ trillion in excess deposits over loans.

How is it possible that there is a record amount of deposits in the US financial system, while the notional outstanding of total commercial loans is less than at the time Lehman filed? Simple - the delta has been filled by the Fed's excess reserves, which amounts to... drumroll... just over $2 trillion, which via circuitous ways make its way back to the bank deposit ledger - this was explained in "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed."

In other words, by becoming America's indirect "bad bank", the Fed has mitigated the concern of a deposit run, or at least within the US traditional banking system, however in the process making the US $14 trillion shadow banking system (where it was been soaking up safe collateral at an epic pace) breathtakingly fragile.

However, shadow banking is a topic for another day. For the time being, the take home message is that at least superficially, there is a record $2 trillion in deposits which are not encumbered by loans, and which incidentally are used by banks such as JPM to fund the operations of its prop trading desks, such as the CIO, and ramp stocks and risk in general, higher (as also explained previously) at least until these investments go horribly wrong and we get the usual theater of Senatorial hearings and the like.

So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago, in "A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming)."

Sure enough LTRO 3 didn't come (for the reasons we explained), and a year after the above post was penned, nothing has still changed in Europe, as Cyprus' bank depositors just learned to their humiliation and savings losses.

What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits. This goes back to centuries of capital formation in Europe, which unlike the US has always relied far more on secured bank loans than on unsecured corporate debt as can be seen on the chart below.

One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.

This happened in Cyprus overnight, where the non-performing asset side of the consolidated bank balance sheet was just forced to collapse to allow the continued operation of the country's financial system, however with a far smaller corporate bond and loan liability matching (there was only €2 billion in bond outstanding in Cyprus which made any realistic bail-in impossible) the only way to shrink the liabilities of the consolidated balance sheet - inevitable when one is terminally impairing assets - was to impair the most sacrosanct of bank liabilities - deposits.

This is precisely what just happened. The reason it happened first in Cyprus was for two reasons: i) the primary bank liability was deposits, and ii) a key source of deposit funding was those "evil" oligarch Russians: after all they deserve to be taught a lesson, or so the populist thinking in Germany and the Netherlands goes. Well, that may be the case, but at least half of the impaired deposits ended up belonging to the local population, which was neither oligarchic, nor "evil", not stole (allegedly) to make their money.

Of course, those who had read Zero Hedge a year ago would have known all about this. This is what we said in March of 2012:

The chart below explains why not only is Europe's severely asset constrained, it is also running out of funding, in the form of depositor cash: the most critical bank liability. Remember: without incremental deposits, banks can not invest in new assets, unless they generate cash from operations, and thus grow shareholder equity. There is a problem: as the final chart below shows, Europe, and especially Scandinavia which has consistently remained off the radar, is literally off the charts when it comes to LTD ratios.


With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.


One year after we warned Europe that it was only a matter of time before deposits become impaired to "grow into" the European bank balance sheet, Cyprus has drawn the short stick.

And yes: we don't know who will be next, but we do know that nothing has changed in the one year since we wrote our warning a year ago (because guarantees - not actions - of unlimited funding by the ECB not only do not help the actual underlying problems, they exacerbate them) and the last thing we want is to be accused by Europe of spreading the evil truth. But we do know that the unprecedented asset-liability mismatch in Europe is very unsustainable, and the lower the funding deposits in a given bank, the greater the eagerness will by management, regulators and politicians to impair, and confiscate said deposits, allowing a parallel collapse in bad assets and a gradual progression to a viable banking system. The only problem is said viability will be on the backs of savers and depositors once more who will have no choice but to lose much more than just 9.9% of their savings before it is all said and done.

So for those who really want to know who is next - look to the left side of the chart above: that's where the loan-to-deposit ratio among European banks is highest, and thus most unsustainable.

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czarangelus's picture

Sorry Tyler. For a precious metals enthusiast, this last year has been anything but short.

DoChenRollingBearing's picture

N N Taleb and Nate Silver have written two books recently that have given this Bearing no more desire to make predictions.  Both of these guys say that (most) predictions are a mug's game, that you are better off plugging leaks (risks & vulnerabilities) in your personal situations rather than trying to predict the next "Black Swan".

Taleb: Antifragile

Silver: The Signal and the Noise

Highly recommended, both are not technical, but ARE instructive.  Both from late 2012.

WayBehind's picture

All EURO banks are screwed. There will be a run on every bank in Europe next week. 

MSimon's picture

That does seem pretty obvious. Which should make US banks stronger.

Prisoners_dilemna's picture

I'm blown away by the facts, insights, and writing style used to convey this info offered here by Tyler, all for free. The coverage of the Cyprus event with the accompanying analysis is a premier example of what causes me to spend 75% of my internet time reading zerohedge.

Post a BTC address tylers. I'm sending you some funds.

BTW Bullish for bitcoin!

WmMcK's picture

Post a BTC address tylers ...

Even some of us who don't believe in it

will then contribute (more) in that case.

Sudden Debt's picture

Same set of conditions apply for their banks vs. economy

bank guy in Brussels's picture

Luxembourg, ha! ... No wonder Juncker instantly criticised the Cyprus confiscation

Seriously I think they are doing a test as to how much dirt EU citizens will eat

The € 7 billion they are stealing from Cyprus depositors is trivial to the Troika

Ben Bernanke prints that up with his morning coffee ... Mario Draghi could have that done after his luncheon linguini

But they are trying to see how much abuse they can inflict without revolution

If the EU banks are blowing up by Tuesday from Mediterranean-wide bank runs, they can go into full reverse, say 'our bad!', and pay the depositors 100% with printed money


It is kind of like how in the USA now in California, they are confiscating the guns now from the military veterans and their spouses, if anyone has seen a mental health professional or been arrested etc ...

They are seeing that it is working out well, people are giving up their guns to the police and SWAT teams, just like they did in New Orleans after Hurricane Katrina

Seems like there is very little 'Molon Labe' or 'out of my cold, dead hands' ... the US police seem ready to accept that latter offer ... and the US citizens, even war veterans who have killed people, are rolling over

Now we will see how much Europe has the spirit of the French Revolution rising, as Beppe Grillo has himself labelled it ...

DoChenRollingBearing's picture

bank guy wrote:

"Seriously I think they are doing a test as to how much dirt EU citizens will eat"

That may be it, + 1.

Mmm, eating dirt...  

But, not in a bearing of course.

Seer's picture

And add another angle: Cyprus, squeezing out the Ruskies.

This shit is always easy to figure out...  ALWAYS look for the invisible hand of the US...

Consider also (source:

Discoveries of large quantities of natural gas in offshore Israel and Cyprus, and the likely discoveries of deposits in offshore Greece, present the most obvious direct threat to Russian federal receipts, because the most likely market for this gas is Europe. Gas production in Norway, the second largest exporter of gas into Europe, is gradually declining as its fields mature. With regard to natural gas from Iraq, Iran and the Caspian, the Nabucco pipeline to deliver this gas to Europe may never be built. Due to the membership of Cyprus and Greece in the Eurozone and to the enormity of their probable reserves, it is in Russia’s national interest to seek to participate in developments there – but not in ways to promote maximum production quickly.


EVERY set of activities are under-girded by energy concerns.  The US is very interested in all of this because it wants to keep energy costs down for the EU countries so that they have more disposable income to spend on US goods.

Lore's picture

Excellent links. Thank you.

Element's picture



EVERY set of activities are under-girded by energy concerns.  The US is very interested in all of this because it wants to keep energy costs down for the EU countries so that they have more disposable income to spend on US goods.

Doesn't it seem to you that triggering a pan-European bank run and deposit destruction, potentially triggering a second global financial heart-attack, may be taking such methods to engender US export demand just a tad too far, possibly likely to do just the opposite, by several orders of magnitude?

Don't over think it.

Lore's picture

It's not even about capital flows; it's just CONTROL.  You agree?

angel_of_joy's picture

Over the next months, a number of Cypriot bankers might have some unfortunate accidents.

Stealing people's money is one thing.

Stealing money from the Mob however, will turn out to be a tad riskier...

I'm sure certain Russian "investors" will be less than impressed by all this "ECM made as do it" explanation...

faustian bargain's picture

You may be on to something... Whoever's next, it to the Euro planners' advantage that there be a significant 'bad guy' to launderers, drug smugglers, terrorists...

faustian bargain's picture

...or some bankster sacrificial lamb they don't mind throwing under the bus...

The Big Ching-aso's picture

Ok, what this world needs is one helluva nice World War to calm everybody down and help them focus.



Zero_Sum's picture

Here's the domino effect that I foresee over the next 72-120 hours:

-First, Cyprus is no longer the story. What's happened there has already happened. For Cypriot(Cyprian? Whatever) savers, it's all over but the cryin'.

-Next, starting tonight and tomorrow, there will be bank runs in Spain and Italy. Possibly Portugal and Ireland as well, though their circumstances are different. I'd include Greece, but no one in Greece has any money to steal anymore. France may be affected too. If France sees ATM runs this weekend, things will be even worse than I predict

-Cyprus has an ordinary holiday on Monday. But if there are runs over the weekend, affected countries will also declare bank holidays.

-On Monday, European markets will get monkey-stomped. US Markets will open up down 2% or more. It gets uglier from there.

-EUR/USD tanks. USD Spikes. US Treasury yields plummet. 

-Gold/Silver could go either way. They could tank on USD strength or rise in the face of it on a flight to safety. We'll know the real state of things by watching online dealers for 'sold out' products this weekend. 

-This doesn't pop up on the MSM radar or the American public's overall consciousness until the market impact on Monday. I do not predict any significant US bank runs. MSM will be working overtime to calm the sheep down. The market drop will be labeled as "the long-awaited pullback. Buy the dip!". Cramer will be in rare form on Monday night.

-If PMs spike, CME will respond by Tuesday with a margin hike on futures contracts. They will hike margins as high as necessary to crush the surge. One way or another, any potential spike will reverse by the end of the week due to blatantly coordinated, repressive manipulation. CFTC will look the other way. The biggest threat to the status quo in this situation is that a surge in PMs is allowed to go unanswered, so it will not be. Don't step in front of this steamroller. There will be better buying opportunities when the dust settles.

-The part I'm chewing on right now is Russia's reaction. This is a little less clear to me. this is obviously a shot across the bow at Russia from the EU. Russia may:

a. Threaten military action by staging "exercises" with their fleet in the med.

b. Retaliate economically via natural gas supply rate hikes.

I think 'b' is more likely, but I'm not sure. What's clear is that Russia was left in the dark about this move, and right now they are PISSED.

More to follow. Strap in for a fun week ahead.

centerline's picture

My bet here is the Russians are going to play this calmly.  Option B most likely if anything.  They really don't have to do much except sit back and watch the fireworks.  The EU is toast.  Has been.  Technically was from it's flawed inception.  Just takes awhile for it to all unfold.

I agree with the USD spike.  Money is going to try and find a better home when the EU shits the bed.  Here in the US I bet it will look and feel like a recovery.  That capital is going to find it's way into everything here.  High unemployment serving as an inflation shock absorber.

fonzannoon's picture

My bet here is the S&P is up 9 points monday and we spend all day celebrating new records. Expecting reality to assert itself now is crazy.

toys for tits's picture



The 10B Euro shortfall in Cyprus banks is if all things are normal.

That upper limit hair trim of 9.9% changes everything regarding the 68B on deposits. This changes everything.

People will be lucky to get 50% of their deposits out after the runs are through.

francis_sawyer's picture

My prediction is that in the US... People will drink green beer all day tomorrow & try to stay awake long enough to watch SELECTION SUNDAY...


Then on Monday ~ ALL of the MSM will breathlessly await [& devote their entire journalistic teams] to cover the ceremony of Obama filling out his NCAA BRACKETS...

By Thursday ~ March Madness will have started [which will keep everyone occupied until the Masters]...

Seer's picture

I feel humbled by your powers to see the future :-)

francis_sawyer's picture

Just put it into the category of one of my crazy whacked out theories...

kchrisc's picture

Your are a prophet sir!     hujel

GreatUncle's picture

Wait till the banks open up for trading Monday and not just the Cypriot ones.

After this most people are just going to want to remove their money full stop and stash it under the mattress.

The banks in Cyprus are now dead in the water because nobody is going to deposit money with you and first chance everybody gets and I mean everybody they are going to try and remove whats left. 

AbbeBrel's picture

Banks are closed for "Green Monday" - this gives the programmers more time to tie down the Sheeple's "Greenbacks".

Seer's picture

While Russia will likely play this calmly I still believe that it's VERY active here.  See my above posting with links that show why this is so important to Russia.

DoChenRollingBearing's picture
@ Zero_Sum
We have seen MANY situations in recent years that could have been VERY SCARY.  That's why I have been trying to be as prepared as possible!  One day, something like you lay out IS LIKELY to happen.  Next week?  Next year?  10 years from now? N N Taleb and Nate Silver have taught me to get OUT of the prediction business!

Seer's picture

"Prediction" is really about risk assessment, about planning.  If one were to toss it out the window completely then one might as well say that it doesn't matter to plan...

Spending too much time predicting, or in reading/listening to others do so, I would agree, is NOT a good idea...  all things in moderation...

Zero_Sum's picture

Yeah, but making predictions on the internet is like gambling with other people's money. No consequences if I get it wrong, but I'll look really smart if I'm right.

tooktheredpill's picture

no way that you can always get it right unless you are God. Amazing what you will say if you don't put your face up.

Juggernaut Nihilism's picture

Someone with sense. A prophet is someone who senses underlying currents, and can judge the inherent fragility of a particular path. A forecaster is a dipshit who takes things too literally and has to keep revising his predictions for the date of the Rapture.


Predictions are for suckers. Make yourself anti-fragile to the approaching storm of volatility, then go drink a bottle of wine and laugh at all the schmucks scrambling around making up stories about exactly what will trigger it and how it will play out. Our track record in such matters is somehow less than random, God knows how we manage that statistical trick.

SKY85hawk's picture

Your prediction has been in my radar for 6 months+.  My Big mistake was to ignore the FED support.

I don't consider myself smart enough to do options with/without margin.


If you're right, I'll be real glad that I have some FAZ & ERY.



Navymugsy's picture

There won't be any electronic bank runs here in Cyprus this weekend as the ATM's are empty and no transfers are being allowed between Cyprus banks and the rest of the world. The bank run on Tuesday when the banks open will be amazing! I'm taking my camera with me when I leave the house Tuesday morning. Just in case...

machineh's picture

With a big enough bulldozer, you could open your bank on Monday.

DCon's picture

Monday is also a bank holiday in Ireland


Seer's picture

+1000 for understanding Russia's play in all of this.

optimator's picture

MSM won't bother with this little unimportant little news item, they won't cancel the bit they plan on the blind dog that found his way home trotting 300 miles to find his family.

Not Too Important's picture

BofA has $65 trillion of derivatives exposure on their retail books, against $1 trillion of deposits.

Are we including this in the equation? What derivatives exposure do all the banks have, US vs. EU? Weren't the bulk of derivatives written in the US?

I think something is missing in this article.

Tyler Durden's picture

What you may be missing is the part that says discussion of shadow banking in the US will be left for another day

Not Too Important's picture

Once the $65 trillion of derivatives exposure was transferred to the retail bank, doesn't that make it no longer 'shadow banking'? It should be under the purview of the FDIC now, with full disclosure under GAAP.

I know, I know . . .

falak pema's picture

lol, too funny; bank balance sheets and nun's mop up the mess as agents of the Lord in Sin City of WS after clean up of OK Corral in old Cyprus.

The new Pope has his work cut out to make the Curia the governance of the poor!

The biggest bunch of Borgias now have to act humble like those naked nuns of Cyprus, poetic concoction high on Commanderia wine. Makes the stuff of legends.

Derivatives and shadow banking are alike the shadow of complacency hanging like a dark cloud, over the unbridled hubris of "we are the capitalist port of last resort...Anybody with any money comes here when all else burns; land of greenback!"

Is that a whiff of 'intellectual sclerosis' ? Twin sin with complacency, that condemns  the happy few to unhappy tommorows?

Bloody Morgan and the pirates flag of the banksta cabal, does it rule over the star and stripes?

We'll soon find out. 

Meanwhile the EU has created a precedent by imposing a banking tax at source on private deposits, legally outside their reach; in a sovereign nation treated like pirates paradise! That or its AUsweis for Cyprus from Eurozone!

Humble pie and sicilian kiss for land of Venus bliss!  No wonder the Oligarchs love it.

Seer's picture

Yeah, capitalist port of last resort because if you don't funnel your money here our military will drone your ass.  And, really, your options are?  Russians?  Chinese?  Saudis?

Never ends well for junkies...

Atomizer's picture

The LIBOR Scandal: Prosecutors Have a New Plan


Would you mind fluffing the ZeroHedge group? I remember this story, we were travelling to Marco Island house last year. Watched this huge scandal via Airplane TV. My ranting and raving landing me no blogging privileges for 12 hours. I have never been so pissed off in my life. We spent that time cooling off at the beach/house. LIBOR still jacks up my blood pressure today.

Element's picture

If you get a parking fine here and won't pay it they'll put you in the slammer.

TSEP - Too Small to Escape Prison.

CaptainAmerica's picture

Death by 16 trillion cuts...

Anusocracy's picture

And not one in the Federal Budget.