The Treasury is working with the Cypriot authorities on a “British solution” to the threat of losses facing the bank’s depositors in the UK, said the Chancellor of the Exchequer George Osborne during a Treasury Select Committee appearance.

Osborne said that discussions are taking place at the moment “to try to avoid the branch of Cyprus Popular Bank in the UK, or branches, becoming sucked into the Cypriot resolution process”. He added he could not disclose anything more about the direction of the negotiations.
Laiki Bank UK is not subject to the Financial Services Authority regulations and is not covered by the deposits Compensation Scheme (covering up to £85,000). The other bank with Cypriot origin operating in the country, Bank of Cyprus, has become a fully UK incorporated company, which means it is not affected by developments in Cyprus.

Analysts suggest that the Treasury could decide to cover losses for Laiki’s 13,000 savers in the UK, in a move similar to the compensation provided to Icesave’s customers back in 2008. Another option could be a merger of Laiki with another UK bank, with the Bank of Cyprus seemingly the obvious choice.

George Osborne told the Treasury Committee that initial plans to impose a levy on bank deposits in Cyprus was a “mistake” that would have caused “considerable damage” and that the crisis had “not been well handled” over the last ten days. He remarked though that one has to respect the fact that a newly elected government was facing “incredibly difficult decisions”, as well as that eurozone was keen to prevent contagion. Mr Osborne expressed his support for the new deal agreed with Cyprus, which involves massive restructuring of the banking sector, saying it leaves the country “with a sustainable debt situation”.

He also disclosed that the UK government has flown out to Cyprus 13 million euros to cover the needs of military personnel and state officials stationed on the island, and he confirmed that a senior Treasury official, Tom Scholar, has been sent out to Cyprus advising the government and helping to sort out the banks.