Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities. Click here to read more international insights.
Are you sitting comfortably? Perhaps you should not be. The Cypriot crisis has left lots of scope for uncertainty, and nowhere more so than in the hierarchy of who gets what when a bank collapses. Depositors in Cyprus with less than €100,000 ($132,500) were saved, albeit belatedly. Those with more face losses of up to 60 per cent.
All of which should lead anyone with deposits of more than that amount in any European bank to question how safe their money is, and to demand higher returns for higher risks. That will lumber some banks with higher funding costs. Research from Morgan Stanley shows that Austria, Portugal, Spain and Greece all receive half of their bank funding from deposits. The proportion of those deposits covered by insurance schemes is also important. In the U.K. and Italy, only a fifth of deposits are covered by such schemes.
The overall result is that the pain of higher funding costs will not be evenly spread. Barclays estimates that the cost to the sector will be €8-billion, or 6 per cent of annual profit. However Lloyds and RBS, Germany's Commerzbank, Spain's Sabadell and Italy's Unicredit and Intesa Sanpaolo would be worst hit.
Banks with large equity bases to absorb losses should be able to benefit by attracting cheaper deposits (especially uninsured deposits of over €100,000), although the higher cost of equity funding will offset that. However, the benefits to these banks will stretch beyond cheaper debt. Anyone who deposits money in a bank is not just a supplier of finance, but also a potential customer.
In the U.K., current account holders typically only take one other product from their bank but there is a strong push to increase that. Banks that can build deposit relationships with the kind of customers who put in more than €100,000 should be able to make a healthy slug of additional income.
The big danger for those banks that want to benefit from this sort of change is lethargy. The possibility of a deposit hit in Cyprus had been discussed for months, but there was no sign of a significant deposit flight until February. Sometimes, people sit just a little bit too comfortably for their own good.