U.S. Bank Depositors Should Pay Attention to Fragile European Banks

The European Union's debt crisis persists as the Continent's finance ministers grapple about what to do with the EU's fragile banks. Bank depositors in Europe could face losses, and U.S. bank depositors should pay attention and prepare.

Some European Union banks remain so financially weak that they may require a government bailout or even have to close.

Either way, depositors could lose money.

The question of who pays for the costs of salvaging weak banks or shutting those not worth saving [in the European Union] must be answered.

Any state help will come at a heavy cost by imposing losses on shareholders and junior bondholders. In time, possibly as soon as 2015, senior bondholders and even depositors with more than 100,000 euros will be forced to take losses.

-- Reuters, Nov. 14

Rating agency Standard & Poor's believes the EU's troubled banks could have capital shortfalls around 95 billion euros.

You will recall that Bank of Cyprus depositors took a haircut earlier this year under the European Union bailout terms. The details were reported four months after the bailout.

Depositors at bailed-out Cyprus' largest bank will lose 47.5% of their savings exceeding 100,000 euros ($132,000), the government said. The figure comes four months after Cyprus agreed on a 23 billion-euro ($30.5 billion) rescue package.

-- USA Today, July 29, 2013

But, even after the bailout and depositor loss, the Bank of Cyprus remains beset by problems.

"Cyprus's banking sector should brace for further turbulence as deposits continue to shrink and bad loans look set to multiply"

-- WSJ, Sept. 18

What does all of the above have to do with the U.S.?

Consider 1) the 1929-1932 economic depression started in Europe before arriving in the U.S., and 2) the Federal Deposit Insurance Corporation (F.D.I.C.) will likely be unprepared for widespread bank failures all at once.

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