Tuesday, March 19, 2013

Cyprus-style deposit tax unlikely in the U.S.

It's now looking like the parliament in Cyprus -- that Mediterranean nation with about as many inhabitants as Mecklenburg County -- will reject the bailout package that includes the across-the-board levy on insured deposits.

Industry types already said they didn't think a larger economy like Spain would try such a plan. But worries about European deposits forced the Dow Jones Industrial Average down earlier this week, and sent U.S. regulators and bank industry groups scrambling to assure people that this sort of deposit tax couldn't happen here in America.

Former FDIC chairwoman Shiela Bair, on American Public Media's Marketplace this morning: "This would never happen in the U.S. because we respect the rule of law and we have a very strong agency called the Federal Deposit Insurance Corporation that stands up for insured depositors and protects them."

The American Bankers Association: "While the situation in Cyprus is a real concern for depositors in Cypriot banks, it has no implication for depositors in U.S. institutions... Simply put, U.S. insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S. government."

Perhaps most interestingly, Business Insider dug up a letter written by the Federal Reserve in 1941 explaining why a deposit tax would be a terrible idea. Here's the full document.