You may remem­ber Cyprus, the Mediter­ranean island that grabbed inter­na­tion­al head­lines last March when its gov­ern­ment was com­pelled by Euro­pean author­i­ties to seize mon­ey that indi­vid­u­als and busi­ness­es had deposit­ed in the country’s two largest banks.

The “bail-in” of Cypri­ot banks, so called because it requires peo­ple who have deposit­ed their mon­ey in fail­ing banks to help save those banks by for­feit­ing some of their deposits, is a por­tent of bank res­cues to come.  In addi­tion to con­fis­cat­ing siz­able chunks of deposits from accounts with large bal­ances, the gov­ern­ment imposed strict con­di­tions on remain­ing deposits, regard­less of size.

So how is that work­ing out?

Not so well, it seems.  In a let­ter to the Troi­ka (a group that orga­nized and helped finance the bailout, com­pris­ing the Euro­pean Union (EU), the Euro­pean Cen­tral Bank (ECB) and the Inter­na­tion­al Mon­e­tary Fund (IMF)), which insist­ed on the bail-in as a con­di­tion for throw­ing a life­line to the gov­ern­ment and to what is now its largest bank, Cypri­ot Pres­i­dent Nicos Anas­tasi­ades wrote:

“Arti­fi­cial mea­sures such as cap­i­tal restric­tions may seem to pre­vent a bank run in the short term but will only aggra­vate the depos­i­tors the longer they per­sist. Rather than cre­at­ing con­fi­dence in the bank­ing sys­tem they are erod­ing it by the day.”

It’s not hard to under­stand why such “cap­i­tal restric­tions” – gov­ern­ment rules that pre­vent depos­i­tors from exer­cis­ing full con­trol over their own mon­ey — might erode people’s con­fi­dence in their banks.  Imag­ine being told that you couldn’t close your sav­ings or check­ing account.   Or open a new one.  Or with­draw more than a fixed amount.  Or use the funds to pay a cred­it card bill.  Or a med­ical bill.

A series of gov­ern­ment decrees (there had been 16 as of June 25) estab­lished these restric­tions.  In the near­ly four months that have passed since the Troi­ka insist­ed on these restric­tions, some have been relaxed.  Oth­ers remain in place.  They’ve reduced strains on banks but haven’t restored them to health.  The Bank of Cyprus remains hob­bled by debt and depos­i­tors have found cre­ative ways to dis­gorge their mon­ey.  Total deposits had declined to 56 bil­lion euro by the end of May, com­pared with 72 bil­lion euro a year earlier.

As in oth­er Euro­pean nations and the U.S., the banks’ sick­ness has vis­it­ed grave con­se­quences on aver­age Cypri­ots.  Peo­ple are out of work.  Busi­ness­es are fail­ing.  The econ­o­my is shrink­ing.  Polit­i­cal insta­bil­i­ty can’t be far behind.  In addi­tion to his let­ter to the troi­ka last month, Anas­tasi­ades met with ECB Pres­i­dent Mario Draghi, although details of the meet­ing were not dis­closed.

In the mean­time, the gov­ern­ment is des­per­ate­ly seek­ing a sil­ver bul­let, some­thing to turn the econ­o­my around.  Tourism is a peren­ni­al source of hope.  Anoth­er are the gas deposits off the island’s south­ern shore.  The val­ue of these deposits and the fea­si­bil­i­ty of extract­ing suf­fi­cient amounts of gas to pro­vide a mean­ing­ful boost to the country’s GDP remain uncer­tain.  There is even spec­u­la­tion about reunit­ing the island under a sin­gle gov­ern­ment.   Turks have con­trolled the north­ern part of the island since 1974.  Now that the cur­rent cri­sis is dra­mat­i­cal­ly reduc­ing liv­ing stan­dards in the Greek-con­trolled south, such reuni­fi­ca­tion, though still far-fetched, may become more feasible.

None of that, how­ev­er, does much for Cypri­ots today.  Their for­mer­ly boom­ing econ­o­my, bur­geon­ing real estate mar­ket, and healthy bank­ing sec­tor boost­ed by for­eign (pre­dom­i­nant­ly Russ­ian) depos­i­tors are now a dis­tant mem­o­ry.  Shock­waves from the Wall Street epi­cen­ter of the glob­al finan­cial cri­sis rat­tled Cyprus to its foun­da­tions.  Like oth­er nations on the Euro­pean periph­ery, its banks are wob­bly, its gov­ern­ment entan­gled in debt, its econ­o­my reeling.

Mean­while, our biggest banks are doing just fine, thank you.  But­tressed by cheap access to cred­it and for­ti­fied by fees, includ­ing those it earns as a “pri­ma­ry deal­er” for the Fed­er­al Reserve in its month­ly $85 bil­lion pur­chas­es of gov­ern­ment bonds and mort­gage-backed secu­ri­ties, JPMor­gan Chase report­ed strong earn­ings last week.  The earn­ings were bol­stered by the fact that the mega-bank reduced the amount of cap­i­tal it sets aside against future losses.

Dur­ing the earn­ings call, bank offi­cials were pep­pered with ques­tions about their abil­i­ty to com­ply with new fed­er­al rules that would require too-big-to-fail banks to hold big­ger cap­i­tal cush­ions.   The pro­posed rules would require “bank hold­ing com­pa­nies” (the par­ent com­pa­nies of large banks) to main­tain cap­i­tal reserves of at least 5 per­cent; their sub­sidiaries who accept deposits insured by the FDIC would have to hold equi­ty equal to 6 per­cent.  That would mean that the hold­ing com­pa­ny would only be able to bor­row $19 for every $1 in equi­ty.  The bank’s offi­cials wouldn’t dis­close its cur­rent lever­age ratios, but acknowl­edged that nei­ther its hold­ing com­pa­ny nor its sub­sidiaries cur­rent­ly meet the pro­posed standards.

Bank­ing lob­by­ists oppose those stan­dards.   They argue that soci­ety will be worse off if banks are forced to bet­ter pre­pare for future down­turns by hold­ing more cap­i­tal.  They will spend a good deal of mon­ey and ener­gy over the next few months in an effort to per­suade reg­u­la­tors to dial back the requirements.

I wouldn’t pre­sume to com­ment on the details of this pro­pos­al and I place lit­tle faith in the capac­i­ty of scle­rot­ic bureau­cra­cies to keep banks secure.  But the results of the last finan­cial melt­down are last­ing and pro­found.  The gov­ern­ment has resort­ed to extra­or­di­nary mea­sures — bailout funds, stim­u­lus bills, record deficits, zero inter­est rates, and wave after wave of “quan­ti­ta­tive eas­ing” — to coax the econ­o­my back to recov­ery.  The results are unim­pres­sive.  And we are the lucky ones.  Europe is back in reces­sion, its periph­ery reel­ing from cri­sis to cri­sis, eco­nom­ic hard­ship fuels tur­moil through­out North Africa and the Mid­dle East, and devel­op­ing coun­tries are whip­sawed by cur­ren­cy fluctuations.

Bank fail­ures are at the root of these dis­rup­tions.   Too-big-to-fail US banks, which have grown big­ger since the 2008 melt­down, are in rea­son­ably good health.  Requir­ing them to hold more cap­i­tal to make anoth­er melt­down less like­ly seems like sen­si­ble policy.