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Citigroup: Cyprus Deal Loser

Another major factor in shoring up large and small U.S. banks was the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, which removed the limit on deposit insurance for non-interest bearing transaction deposit accounts -- business checking accounts -- until the end of 2012, when all deposit accounts became subject to the regular $250,000 insurance limit. The Temporary Liquidity Guarantee Program also provided government backing for some some unsecured debt, issued by U.S. banks through June 2012.

KBW analyst Frederick Cannon in a report on Sunday pointed out how irrational depositors' behavior can be, saying "during the financial crisis the number of depositors demanding their money back from IndyMac Bank increased after the FDIC took over the institution, including many insured depositors."

While there continues to be plenty of outcry in Washington against banks that are "too big to fail," the U.S. government's decision to cover nearly all deposits of the hundreds of failed banks through the credit crisis has resonated with depositors. According to KBW, the nation's largest banks had a significantly higher percentage of deposit accounts with total balances exceeding the deposit insurance of $250,000 at the end of 2012, than there were with total balances exceeding the old limit of $100,000 at the end of 2007:
  • According to KBW's data, 64% of deposits at Bank of America(BAC - Get Report) were in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 44% at the end of 2012.
  • For JPMorgan Chase(JPM - Get Report), 53% of deposits were in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 51% at the end of 2007.
  • Wells Fargo(WFC - Get Report) had 44% deposits in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 41% at the end of 2007.
  • Citigroup had the 31% of total deposits in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 21% at the end of 2007.

Rafferty Capital Markets analyst Richard Bove on Monday said in a report, "in Spain, the government has apparently made the decision to recapitalize the nationally owned banks. The shareholders in any partially publically traded institutions will be wiped out and it is estimated that bondholders in these companies will lose 30% of their investments."

The resolution of Spain's banking crisis and the resolution in Cyprus "will be truly terrible," Bove wrote, adding that "depressions will ensue for many years causing incredible misery.

"Observers will learn why it is bad policy not to bail out banks; why main street wins when banks are bailed out," he wrote.

U.S. banks certainly don't need the additional deposits they are likely to gain if there is a big outflow from European banks, since overall loan demand is weak and the interest rate environment remains hostile. But "American banks are very strong relative to any historical gauge," according to Bove.

Citigroup's Shares are Cheap


Shares have Citigroup have returned 12% this year, following a 51% return during 2012.
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