In March 2009 an EU directive increased the value of the protection afforded by a deposit guarantee scheme (DGS) to a uniform ceiling of €100,000. Events involving Cyprus have undermined the credibility of that provision. In recent days, as the Eurogroup President was reaffirming the importance of a full guarantee (by the sovereign, not its central bank) to deposits below €100,000, the President of Cyprus was pointing to the inordinate sum involved: €30 billion euros.

What the EU directs, it has neither the will, nor the obligation, nor the resources to provide. More now than ever before, a full EU banking union, involving mutual DGS, is an unlikely prospect.

Deposits cannot be guaranteed across the eurozone and it is wrong to assure depositors to the contrary; and the situation is very much the same in the UK. If that comes as a surprise, then a recent joint paper from the Bank of England and the US Federal Deposit Insurance Corporation should give pause for thought. In following the EU Recovery and Resolution Directive, those two authorities have been collaborating ‘to develop resolution strategies that could be applied to their largest financial institutions’.

In brief summary, the proposals are clear. Where a large proportion of the liabilities of a too-big-to-fail financial institution are insured, a DGS ‘may be required to contribute to the recapitalisation’ of those institutions. The argument is that, if the bail-in of funds ‘provides for continuity in operations and preserves value’, the losses to DGS would be lower than from the liquidation of the institution. And if not, then what?

As with the current situation in Cyprus, the focus would be redirected to any ruse that delivers the same outcome as an open write-down of insured deposits. Hence, the proposal to levy a ‘tax’ upon insured deposits in Cyprus (although, bizarrely, with the quid pro quo of worthless bank equity).