The recent times had witnessed the Cyprus banking crisis and the way in which that policy had framed has baffled many. But under the entire entanglement, there seems to be a silver lining hovering over the horizon. The Europeans may have ‘accidentally’ solved the bank capital adequacy problem it was so inept to and consequently the European banks may have risen from being coined as having the ‘weakest banks’ to having the “strongest” with due regards to the capital adequacy. But the question arises-what brought about the turnaround?

By inflicting losses on large depositors in Cyprus, the EU has redefined all liabilities that aren’t labeled as capital, thereby exploding the capital ratios of the corresponding European banks, with the stroke of a pen. The imprint has left a mark on all the uninsured depositors who don’t want to risk being treated like equity holders when it comes to losses. This is especially true for depositors in Greece, Spanish, Portuguese and Italian banks. The ensuing days might witness the flight of depositors from European banks and not only from those in Cyprus.

The other lesson from the Cyprus debacle is that pretending the sovereign debt is riskless might be illusionary and dangerous. Cypriot banks loaded up on Greek debt, which was both non-diversified and risky. Cypriot supervisors should have been well-warned, but chose to turn a blind eye to the impending problem.

In conclusion, the decision on Cyprus also has interesting implications should a large corresponding institution in the European region fail. The conceived losses will be of enormous proportions, unless the policy is clarified and simply declaring Cyprus as a one-off event will certainly signal the calm before the storm. Since most of the banks in the Euro zone have been rescued rather than reorganized, the assumption had been that all depositors would be protected. The question remains- How will European regulators respond to the next Cyprus-like crisis in a much larger economy, if and when it occurs? The end result of Euro zone handling of the Cypriot crisis is to create incentives on the part of depositors to look for safe havens, and we now know that Europe is not one of those.