“I still find it hard to understand how depositors at banks are "investors" and therefore treated like real investors such as bond and stockholders of the bank. At least certainly not on the same level. It appears the various authorities are more interested in protecting the big banks and sovereign holders. Is there not a fundamental trust element that is far more important than bond and stock wipe outs. Can you elaborate on this?”

Eoin Treacy's view Thank you for this email which may be of interest to other subscribers. As a US investor you will be familiar with the Federal Deposit Insurance Corporation (FDIC) which was set up in the 1930s to protect regular savers from bank failures and to reduce the risk of bank runs. In order to do this it levies a premium on its more than 7000 client institutions and uses this fund to protect $100,000 of depositors savings. In the event of a bankruptcy the hierarchy of creditors is adhered to so equity is hit first, then bond holders and finally larger depositors. It is for this reason that I characterised the Cyprus solution as an FDIC type solution in yesterday's comment.

The European Financial Transaction Tax has been designed to reduce volatility and to raise cash for the respective governments who have signed up for it, but it does not suggest that a pan European FDIC type insurance corporation will be formed. The ECB is set to become the overarching regulator for banks in the Eurozone but while this role will attempt to ensure that banking sectors will not misbehave in future, it does not detail with how a bank failure will be handled. The Eurozone needs greater fiscal union for currency union to function smoothly. An institution devoted to resolving bank collapses would be a great help in restoring confidence.

You quite rightly highlight the fact that banks rely on trust and do whatever they can to bolster it. This quotation from Sir John Templeton has always struck me as being particularly poignant:

“It is human to be subconsciously influenced by appearances. Those banks which inhabit marble palaces usually attract the most customers . ? . ? . ? The feeling of optimism and prosperity is contagious. The counsellor whose manner and words reflect uncertainty or disappointment will quickly give the same feeling to the client; and the counsellor whose manner and words reflect confidence and prosperity will quickly give the feeling of confidence to the client”.

We sometimes naively expect that a bank will act in a manner which is aligned with our interests. However in the event of a failure the simple fact is that senior depositors committed their capital to the bank in return for an interest rate. In doing so they accept that the bank has invested the capital using the most profitable means at its disposal. Sometimes those investments work out and sometimes they don't.