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JPMorgan: Opening "Pandora's Deposit Box" Means "More Extreme Deposit Flights In Future Crises"

Tyler Durden's picture


There are three key highlights in yet another take on Cyprus, this time from JPMorgan's Robert Henriques: the first, and most obvious, is that "more extreme scenarios of burden-sharing will not necessarily reinforce investor confidence" - that much is clear; the second, as we pointed out over the weekend, is that what happened in Cyprus is a "the death knell for an EU Common Deposit Guarantee scheme, which was to be an integral part of the Banking Union proposals" - so much for the key part of European monetary and fiscal integration. But the third, and most important, is that "we would expect future crises to be exacerbated by more extreme deposit flight. This would likely mean the ECB would have to increase its presence as liquidity provider of last resort, which, under normal circumstances, would lead to increased asset encumbrance and lower recoveries for senior debt." The problem for Europe, as diligent readers know too well already, is that asset encumbrance is already at record high levels, meaning the ability to find "free" assets used to create new loans will be next to impossible.

Then again, the market is nearly green, and the DJIA is just shy of all time highs once more, so all must be well.

From JPMorgan:

Opening Pandora's Deposit Box

In our opinion, there are likely to be several broad impacts as a result of the decision to impose a tax on the deposits held by the Cypriot banking system. In the first instance, we think that this is testament to the fact that EU policymakers are willing to contemplate more extreme measures in the always difficult process of balancing sovereign and bank solvency. We recall that it was not too long ago when EU policymakers were agonizing over the decision to impair senior unsecured bondholders, we now move to a situation where the depositors are now being forced to participate in what we think is a burden-sharing exercise in all but name. Ironically, while bondholders may be saved from burden sharing in this exercise, we expect that having more extreme scenarios play out will not necessarily reinforce investor confidence, with the implementation of the EU’s RRD (Resolution & Recovery Directive) being a fast-approaching milestone. At the very least, we think that this places pressure on policymakers to push forward with the 2015 implementation date with no delay, to give a common framework for future bank bail-outs that will avoid ad-hoc outcomes such as the expropriation and depositor “Taxes”.

An immediate consequence of the decision to impair the deposits within the Cypriot banks, is that this will be the death knell for an EU Common Deposit Guarantee scheme, which was to be an integral part of the Banking Union proposals. Clearly, in a scenario where insurer deposits, i.e. below the €100k threshold, can be impacted by a one-off tax such as in Cyprus, the effectiveness of such a deposit guarantee will be clearly undermined. What is an even greater concern is the fact that depositors can become part of the equation in solving a banking crisis in extreme circumstances, although we appreciate that this may have been driven by the unique liability structure of the Cypriot banks, in addition to the origin of the off-shore deposits. We note that a common deposit guarantee scheme would have been designed to reinforce and stabilize depositor confidence whilst a bank or banking system was being subject to a resolution outcome. Our major concern is that with this action, one of the stabilizing instruments will have been completely undermined in the current process and, in future, we may see a very strong reaction in deposit flows in the event that a banking sector may experience  stress. In the event that a run on deposits becomes a more feasible outcome, we think that this places a greater onus on the ECB to provide liquidity.

An additional concern is the subversion of the order of subordination, with depositors, who were ostensibly ranking pari passu with bondholders at worst, suddenly finding themselves having a worse outcome than more subordinated liability holders, albeit with limited amounts of subordinated debt outstanding. We think that this reinforces the need for a rapid implementation of the RRD, which would avoid such outcomes and give investors greater certainty as to where they stand in the liability structure.

A Question of Contagion

In terms of the overall market impact, the key issue will be the element of contagion among the peripheral banking sectors, where there may still be some residual concerns with regard to solvency and where strained sovereigns have very limited scope to provide further taxpayer resources. In the event that we had to note strong deposit flows in those jurisdictions, we think that this would undermine broader investor sentiment. We note that while the markets themselves may appreciate the unique circumstances that drove the decision-making process in Cyprus, it remains to be seen how well that translates to retail depositors elsewhere in the periphery.

Deposits become a little bit less sticky

We note that there was a significant level of deposit out flow following the Spanish banking crisis; however, it was likely that this was somewhat mitigated by the expectation that depositors would be spared any loss outcomes. Indeed, following the recapitalization plans of the Spanish banks post the stress tests, we have seen depositor recovery. Whilst the direct impact is limited from a Cypriot deposit tax, we highlight this undermines the safety of insured deposits when there is another crisis. As such, we would expect future crises to be exacerbated by more extreme deposit flight. This would likely mean the ECB would have to increase its presence as liquidity provider of last resort, which, under normal circumstances, would lead to increased asset encumbrance and lower recoveries for senior debt. We note that ECB secured borrowing is expected to be exempt from the RRD proposals.

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Mon, 03/18/2013 - 13:15 | 3343183 Edward Fiatski
Edward Fiatski's picture

You don't say.

EUR 1.2 by Summer's end - perhaps, that's exactly what the Germans want.

Mon, 03/18/2013 - 13:23 | 3343227 hedgeless_horseman
hedgeless_horseman's picture



JPMorgan: Opening "Pandora's Deposit Box" Means "More Extreme Deposit Flights In Future Crises"

Capital controls will fix that.

Mon, 03/18/2013 - 13:26 | 3343239 NotApplicable
NotApplicable's picture

Capital controls d.b.a. "RRD."

Funny how the only solution is ever more integration.

Color me shocked.

Meanwhile, I've yet to find a single person at work today that's even heard about the "bailout."

Mon, 03/18/2013 - 13:34 | 3343279 fuu
fuu's picture

Strange how JPM being a bunch of liars is off the front page due to Superstorm Cyrpus which kicked off within 48 hours of the Senate findings.

Mon, 03/18/2013 - 13:37 | 3343289 krispkritter
krispkritter's picture

And it looks like Cyprus is getting up a head of steam:


http://rt.com/business/putin-cyprus-levy-unfair-424/  “unfair, unprofessional and dangerous,” Putin said...




Look! Over there!

Mon, 03/18/2013 - 13:56 | 3343376 Pseudo Anonym
Pseudo Anonym's picture

i'd wager that v.putin had some "savings" stashed in cyprus banks as well;  otherwise, him being an ex-kgb, the term "unfair" should not even be in his vocabulary

Mon, 03/18/2013 - 16:15 | 3344209 SWRichmond
SWRichmond's picture

"more extreme scenarios of burden-sharing will not necessarily reinforce investor confidence"

So, privatized gains and socialized losses are "burden-sharing", eh?

In any event, the correct way to read the above statement is: "If you're going to panic, panic first".  I panicked quite a number of years ago, and so learning of these seizures of private property neither surprise me not shock me one bit.

Mon, 03/18/2013 - 13:39 | 3343302 NotApplicable
NotApplicable's picture

I can't hear you through the sounds of March Madness.

Mon, 03/18/2013 - 14:02 | 3343399 pods
pods's picture

The ones that I have infected with my way of "thinking" have all seen this as being a major new boundary being crossed.

There is always hope.


Mon, 03/18/2013 - 13:28 | 3343254 fonzannoon
fonzannoon's picture

Hedgleless please tell me why JPM would put out a piece about opening pandora's box and deposit flights? If the banks were truly worried about that, that is the last thing they would be doing.

This reeks of bullshit. They are trying to cause a crisis that can only be cured by money printing. The ECB wants to turn on their machine and join the party.

Mon, 03/18/2013 - 13:31 | 3343260 hedgeless_horseman
hedgeless_horseman's picture



...please tell me why JPM would put out a piece about opening pandora's box and deposit flights?

  1. Look...over there...a distraction!
  2. We better pull our assets into the USA where they are safe!
Mon, 03/18/2013 - 13:32 | 3343270 fonzannoon
fonzannoon's picture

sounds right.

Mon, 03/18/2013 - 13:38 | 3343297 Edward Fiatski
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Yep, and it may give Fed the room to ease off the foot on the metal-pedal. :)

Mon, 03/18/2013 - 13:46 | 3343305 hedgeless_horseman
hedgeless_horseman's picture



it may give Fed [and the BOE] the room to ease off the foot on the metal-pedal print like mother-fuckers..

The printing presses are controlled by foot pedals.

  1. Look...over there...a distraction!
  2. We better pull our assets into the USA where they are safe
  3. Synchronized diving...

Germany, like Japan, are post-war pawns. Their currencies are DESIGNED to be debased, as and when needed, to achieve synchronized diving with the pound and dollar. If Germany wasn't in the Euro, its prior experience with hyper-inflation would prevent it from debasing when instructed to do so (obviously not a problem with the Nips). Both countries go along as willing pawns simply because they have been re-created post-war as export nations totally reliant on weak currencies.



Mon, 03/18/2013 - 13:49 | 3343335 Edward Fiatski
Edward Fiatski's picture

Perpetual QE is already priced into the USD. The FX market was doing the same for the Yen & the cable last two-four weeks, as such devaluations came "unexpected", esp for the Pound.

Next up is the EUR.

Ben has to wait till the circle is complete, prior to resuming.

Mon, 03/18/2013 - 14:00 | 3343386 Edward Fiatski
Edward Fiatski's picture


Yes, yes that too. But it's the rhetoric that counts nowadays, isn't it? The month's end exchange rates will determine the truth.

Come back here on Wednesday. :)

Mon, 03/18/2013 - 14:00 | 3343389 LawsofPhysics
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Bullshit, Ben isn't waiting for shit and he continues to monetize debt directly to the tune of 85 billion per month, indefinitely.

Mon, 03/18/2013 - 14:04 | 3343407 Edward Fiatski
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I'm pretty sure they called up Bernanke prior to releasing this a few mins ago,

French President Hollande says it is the time to improve competitiveness.

ECB's Asmussen says it is a must for Europe to become more competitive.

ECB's Asmussen says unlimited OMT is an important signal to market.

ECB's Asmussen says ECB has not done too little or too much.

Mon, 03/18/2013 - 13:28 | 3343228 tickhound
tickhound's picture

Seems it's what Goldman and JPM both want the way they've been talking this up.

Morgan Stanley's been getting that 3's a crowd feeling for some time..

Mon, 03/18/2013 - 13:41 | 3343309 NotApplicable
NotApplicable's picture

I would assume they are amongst the bondholders kept whole.

Mon, 03/18/2013 - 13:56 | 3343378 tickhound
tickhound's picture

Somebody has to benefit from excessive Bear, Lehman, MS exposure...

History shows a little targeted "Systemic Risk" is good for consolidation.


Mon, 03/18/2013 - 13:41 | 3343308 Irelevant
Irelevant's picture

EUR 1.2 in 2 weeks. I said this is what they want, I doubt this is the way to stop at 1.2, it will go much lower.

Mon, 03/18/2013 - 13:15 | 3343188 DoChenRollingBearing
DoChenRollingBearing's picture

My own bank run, a slow one underway for MANY years, is picking up the pace...  Buying gold today!

Mon, 03/18/2013 - 13:16 | 3343192 LawsofPhysics
LawsofPhysics's picture

Fuck you Jamie, creating counterparty risk and problems where there are none seems to be the job of every banker these days.

Mon, 03/18/2013 - 13:16 | 3343198 The Heart
The Heart's picture

Backpedaling fast. The coin is still tossed in the air. Nothing is for sure. What will it show when it all comes down?

German parties slam Cyprus deal:

"Berlin - Leading figures from across the German political spectrum criticised Europe's bailout deal for Cyprus on Monday, describing plans to impose a levy on small savers in the Mediterranean island's banks as a major mistake.

Finance Minister Wolfgang Schaeuble, who represented Germany in the rescue talks in Brussels, tried to deflect blame for the agreement however, saying it was “not the creation” of the German government and that he was open to changes"


Mon, 03/18/2013 - 13:28 | 3343251 ghostfaceinvestah
ghostfaceinvestah's picture

You would expect them all to backpedal given the criticism, but the cat is now out of the bag.  Just the fact that this was suggested should be warning enough to any bank depositor anywhere.  Or for that matter, anyone holding monies in any public account anywhere (that includes you, 401k account holders).  

And let's not forget, this isn't the first time something of this nature has happened (and certainly won't be the last).  Just a few years ago Argentina nationalized private savings.

If you aren't holding significant amounts of physical, you just aren't paying attention.

Mon, 03/18/2013 - 13:35 | 3343288 Mike in GA
Mike in GA's picture

This could be backpedaled all the way but the mortally wounded casualty is confidence. 

It takes years if not decades to rebuild confidence after a financial debacle but only one incident like this to lose it.  Loss of confidence is truly the beginning of the end.

Mon, 03/18/2013 - 13:16 | 3343200 machineh
machineh's picture

 "we would expect future crises to be exacerbated by more extreme deposit flight.

Flee on the rumor, repatriate after the haircut.

Mon, 03/18/2013 - 13:17 | 3343203 CrashisOptimistic
CrashisOptimistic's picture

More talk of the significance of this and that and how more firm actions will do that or this.  It's all BS.  It is past the water's edge now.

No bullets fired.  Nothing changes.

Mon, 03/18/2013 - 13:20 | 3343208 fonzannoon
fonzannoon's picture

Oh I get it now. This is a back door way to help Mario twist Germany's arm to start printing.

"This would likely mean the ECB would have to increase its presence as liquidity provider of last resort"

Mon, 03/18/2013 - 13:23 | 3343226 ekm
ekm's picture

ECB can't do anything if euro banks have losses in dollars

Mon, 03/18/2013 - 13:24 | 3343233 fonzannoon
fonzannoon's picture

that is true, which is why the swaps won't stop. However in this situation the bank runs will be on euro.

Mon, 03/18/2013 - 13:25 | 3343240 ekm
ekm's picture

Let's see........Wednesday.



Mon, 03/18/2013 - 13:40 | 3343306 kito
kito's picture

there will be no bank runs....the citizenry is way to f-ckin apathetic to everything going on....geezesjesus man, even with greece hanging on by a thread, the people STILL keep their money in the bank...............same goes for spain......................its so sad...................they are getting trampled on, yet the fear of LEAVING THE EURO, the threat of returning to their own valueless currencies are far more powerful forces that keep the populace at bay......fonz, there will be no widespread bank runs, because the globalist assholes keep hammering home to the sheep the lie that a bank run will destroy the banking system, will destroy their country, will destory the euro...throw the world into the dark ages.....pestilence and horrible famine should that occur...........its rather unbelievable................

Mon, 03/18/2013 - 13:43 | 3343317 fonzannoon
fonzannoon's picture

lol believe me Kito I have been saying that all along. Of course their will be no bank runs. The central banks will plug every hole and people will not even know there was one to begin with.

The NCAA tourney is starting, I just don't have a lot of time for this stuff with my brackets and all.

Mon, 03/18/2013 - 13:45 | 3343325 LawsofPhysics
LawsofPhysics's picture

Indeed, nothing changes until people start to believe their own "lying eyes" and actually do something.  S&P is now saying that the situation in the EZ is "socially explosive".  Right, how well armed are europeans these days?  How "explosive" would such a situation be in orange county california if the power went off and the banks didn't open or do business for a few weeks?  Hhmm, I wonder...

Mon, 03/18/2013 - 13:48 | 3343340 fonzannoon
fonzannoon's picture

Funny between S&P and JPM and everyone else they are trying their asses off to create a panic.

Mon, 03/18/2013 - 14:02 | 3343394 LawsofPhysics
LawsofPhysics's picture

Why not, Germany and the rothschilds would love a weaker Euro right about now.

Mon, 03/18/2013 - 14:46 | 3343649 kito
kito's picture

they are in a bit of a catch22 eh?? a weaker euro would be the result of instability...................which they do not love......................far more important to hold it together, even if that means a higher euro.......................

Mon, 03/18/2013 - 17:07 | 3344454 OccupyTVstations
OccupyTVstations's picture

there will be no bank runs

Unless JPM wants bank runs. Recall the JPM VP in 2008 that said ~ "oh no, we're not going help out homeowners with the bailout money, we're going to use it to buy up the failed competition."

Are JPM, Goldman and friends waiting to snatch up all the failed banks at bargain basement prices? Of course they'll pose themselves as the saviors... Italy, do you want our 'help' too?

Mon, 03/18/2013 - 13:56 | 3343261 e m m
e m m's picture

Could be, would take care of the DAX too, and at the same time, Merkels can sell fiscal and monetary strictness to their voters.

Mon, 03/18/2013 - 13:20 | 3343212 machineh
machineh's picture

"we expect that having more extreme scenarios play out will not necessarily reinforce investor confidence"

"The war situation has developed not necessarily to Japan's advantage" -- Emperor Hirohito, August 1945

Mon, 03/18/2013 - 13:21 | 3343214 Sandmann
Sandmann's picture

Capital Controls are on their way

Mon, 03/18/2013 - 13:23 | 3343225 magpie
magpie's picture

Nada. Bank holidays and ATM shutdowns are the only capital controls available.

Mon, 03/18/2013 - 13:35 | 3343282 ziggy59
ziggy59's picture

..and gun confiscation

Mon, 03/18/2013 - 13:37 | 3343294 McMolotov
McMolotov's picture

As I said a few weeks back, people will eventually come to regard border patrol officers as prison guards.

Mon, 03/18/2013 - 13:21 | 3343215 trollin4sukrz
trollin4sukrz's picture

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. ” – Thomas Jefferson

Mon, 03/18/2013 - 13:27 | 3343249 hooligan2009
hooligan2009's picture

he was one smart bastage

Mon, 03/18/2013 - 13:40 | 3343303 Hughing
Hughing's picture

..and as broke as a dropped plate

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