Friday, March 22, 2013

Bailouts, Bail-ins, Haircuts and All That: Program Notes for the Cyprus Banking Drama

Ireland, Iceland, now Cyprus—the story of small countries with oversized banking systems is all too familiar. There is never a shortage of commentary when a crisis erupts, but much of it assumes a working knowledge of financial terms and concepts. General readers are left wondering—What is a haircut? What is the difference between a bailout and a bail-in? Who wins and who loses when the government steps in to rescue a failed bank?

I know the feeling behind these questions. It is the same as I get when I go to an opera sung in an unfamiliar language. If you are among those who ask such questions, what you need are some program notes to help you understand the Cyprus drama, and by extension, other banking crises like it. (If you want still more detail, check out this slideshow that complements these program notes.)

Act 1, Scene 1. How can we tell if a bank has failed?

System-wide banking crises like that in Cyprus always begin with the failure of individual banks. In principle, it ought to be easy to tell when a bank has failed. In practice, that is not always the case. >>>Read more

For more, follow this link to view or download a classroom-ready tutorial on bank failures and bank rescues

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