Fairness and Reflexivity in the Cyprus Bail-In

Empirica, J. of European Economics, Published on line 4. Sept. 2015

The Wharton Financial Institutions Center Working Paper No. 14-04

29 Pages Posted: 16 Mar 2014 Last revised: 9 Sep 2015

See all articles by Stavros A. Zenios

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: August 1, 2015

Abstract

The Cyprus debt crisis provides some unique lessons. By the time an assistance program was agreed with the Troika of international lenders, the problem had become so complex that a depositor bail-in was implemented to safeguard financial stability. The bail-in was an ad hoc solution applied for the first time in the eurozone but is now the blueprint for dealing with future banking crises. This paper examines the events for the eighteen-month period before the two eurogroup meetings on Cyprus in March 2013, and the resolution and restructuring of the two systemic banks of the country with depositor bail-in. We show how delays in dealing with the crisis exacerbated the problem but also how the tools brought in to solve the problem had significant unintended consequences that fit the reflexivity principle. Available evidence questions the validity of confidential studies guiding the policy decisions on depositor haircut and supports the argument that the bail-in, as implemented in Cyprus, violated international principles of fairness. We use the analysis to draw some lessons on the use of bail-in for future crises.

Keywords: financial crisis, banking crisis, depositor bail-in, risk management, neglected risks, eurozone, Cyprus, Greece

JEL Classification: E32, E44, E63, F32, F34, G33

Suggested Citation

Zenios, Stavros A., Fairness and Reflexivity in the Cyprus Bail-In (August 1, 2015). Empirica, J. of European Economics, Published on line 4. Sept. 2015; The Wharton Financial Institutions Center Working Paper No. 14-04. Available at SSRN: https://ssrn.com/abstract=2409284 or http://dx.doi.org/10.2139/ssrn.2409284

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

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