There is a lot of BS talked in Ireland at the moment about bank runs.
For ordinary depositors with no experience of a bank run, they probably see it as something like this, from ‘It’s a Wonderful Life’
Playing to this view, people who’s job reply on the stability of the banking sector tend to say ‘ If the banks start to lose deposits, then the ATMs will stop working, there will be no money available for people to collect their wage packets’ etc etc.
Well, Irish banks have suffered a run (of sorts) in recent months and nobody seems to have noticed anything.
We can look at Anglo, without causing too much panic, because that institution is being wound up anyway. In the six months between June and December 2010, Anglo’s deposits fell from €23.1bn to €11.1bn, a drop of 52%. Or, to put it another way, Anglo lost 3% of its deposit base every week for six months.
In isolation, that would be a catastrophic situation for any bank, one that would rapidly lead to that bank having to close it’s doors.
But yet, if I have money on deposit at Anglo Irish I can stil go in there and withdraw my deposit as easily as ever. Why is this?
It is because banks do not operate in isolation. They have the ECB (and occasionally the national central bank) to fall back on. True, there are also deposit guarantees, but I am fairly sure that they will never come into play.
If a bank’s, (such as Anglo’s), funding situation becomes unsustainable then the ECB will want to see it wound up, but the same ECB will provide that bank with all the liquidity it requires to smooth the process of that wind-up.
If, on the other hand, the ECB had decided to play hard ball with a bank, and allow it to fail, the contagion would have led to the failure of the Irish banking system.
So, a bank run is not something to be feared by anyone other than bankers. Deposits might leave a particular institution, as they have done with Anglo. That institution will then collapse in the arms of the ECB where it will find the resources it needs to have a dignified death. The ordinary depositor who does not withdraw their money from the dying bank will eventually get a letter saying that their money can now be found at another institution. Thanks to the trojan work of the ECB, there should be no fuss and certainly no call on any deposit guarantee.
For those banks who did not adhere to prudent lending practices in the last decade, the writing should be on the wall. But for ordinary depositors to worry about losing their money is mis-guided view that is not taking into account the ECBs pro-activity in managing the crisis.
On this blog I like to look at bank funding and central bank actions, and am often critical of such things, but credit where credit is due, the ECB have done a great job of overseeing a bank run so well that most people didn’t even notice it happening.
Is it 1 April already?
@Yogan,
Not quite.
I just think that it is interesting that the Irish Banks spent the second half of 2010 hemorrhaging deposits and still managed to open their doors every morning.
I know there has been an insane (and probably uncallable guarantee) and the ECB has had to bend their rules to breaking point to pull it off so far.
But, the banks are still open, despite the fact that they should have been unable to meet the deposit withdrawals.
So, small praise to the ECB, (couldn’t bring myself to praise the guarantee), but more importantly, there seems to now be a mechanism in place to close down defunct banks that does not involve large queues of panicked depositors clogging up the high street.
Something worthy of note..
Congratulations on running an excellent blog. But were you being entirely serious when you wrote “So, a bank run is not something to be feared by anyone other than bankers”?
Do you not remember Northern Rock? I remember it well. My Dad had money there and asked me to get it out for him (via his internet banking account) as I had faster internet access than he. Despite public assurances, it simply wasn’t possible. So it looked as if my Dad’s money might be gone or possibly discounted and delayed.
Meanwhile then finance minister Brian Cowen was advising depositors that they could leave their money at Northern Rock as it was secure there. He said this even though the average Irish deposit at NR was about three times the limit of the UK individual deposit guarantee scheme i.e. had he given that advice as a solicitor to a client, he might have invited a negligence suit had NR later gone belly-up.
It was only some days later, after the UK Chancellor had used the power of the UK state to guarantee all deposits in full, that the crisis abated. But I can assure you that my father had good grounds to fear for his financial position until then.
The problem for the ECB is that has broken its own rules in advancing funds to the Irish banks. The Bagehot rule, which has been repeatedly enunciated as part of ECB doctrine, is that unlimited liquidity should be advanced in a crisis to solvent banks. But (a) the Irish banks are most probably not solvent – we will get updated estimates of the possible holes there at the end of March, and (b) Bagehot suggested that, in order to avoid moral hazard, central banks should charge high interest rates for emergency funding advanced to illiquid but solvent banks – the ECB is charging a peppercorn rate.
When Bagehot enunciated his doctrine, the Bank of England was a private, profit-making entity. So it made absolute, long-run sense for it to charge a high interest rate for emergecny funds advanced. A century later, JP Morgan (the individual and the bank) essentially played the role of US central bank (intervening at the bottom of financial panics to effect an asset price floor) albeit as a private-sector, profit-making entity.
The ECB is not established as an expressly profit-making entity. Instead it’s a sort of socialised VHI of central banking where the entitity is called an insurance company but is really just a risk-pooling entity where the state calls the shots as the real long-run financial risks are either not measured, ignored or obfuscated. The key motive in ECB decisions (as at the VHI) is not central banking (or insurance) but political.
By providing unlimited funding (in conjunction with the Irish Central Bank) to the Irish banks, the ECB is ignoring its own doctrines and rules. This is why Herr Weber (departing head of the Bundesbank) has walked off the field and why Herr Steinbruck (former German finance minister) ruled himself out as a possible successor.
The problem for individuals facing this world in which government authorities exercise massive powers and ignore their rulebooks in order to serve political motives is that a difficult and uncertain investing environment where people generally attempt to play by the rules (largely free markets) gets replaced by a capricious and totally unpredictable environment where the authorities operate by their own, constantly rewritten rules, (managed markets).
Hayek said it best when he wrote “The more the State plans, the more difficult planning becomes for the individual.”
Cormac,
Thanks for the excellent comment.
My reasoning behind writing this post is fairly simple. Considering the loss of deposits at some institutions in the Irish banking system, at least some of the banks here should not be able to open their doors. And yet, they are still operating – perhaps not fully as ‘business as usual’ – and there has been no panic. Under normal circumstances they would be closed, and yet they are not. A point worthy of discussion.
Northern Rock certainly wasn’t the ECBs problem, and I should have been clearer in the blogpost that I was only talking about banks that are regulated by the ESCB.
Bank runs do still happen (apparently there was one in S. Korea last week) but the crisis within the eurozone has been notable for the lack of bank-runs, despite all the usual ingredients for one existing for some time.
As for Cowen making pronouncements on the safety of bank deposits in off-shore banks, anyone taking financial advice from Irish Taoisigh would not be likely to remain solvent for long – remember Cowen’s predecessor Ahern in September 2008 advising people to buy bank shares?
@ Lorcan
“but credit where credit is due, the ECB have done a great job of overseeing a bank run so well that most people didn’t even notice it happening.”
Thats so delightfully subtle, that like Cormac and Yogan, i’m not sure whether you’re being sarcastic or not! It’d be correct on both meanings in my view!
Hi Lorcan,
How much more of a bank run can the ECB cope with? €5bn (no problem)? €50bn (this is getting serious)? €150bn (sod this, we can’t guarantee one country at this level).
It’s probably academic because both the IMF and BoI are reporting a degree of stabilisation in deposits since end November 2010, but the December 2010 figs still showed a €3bn decline of private sector deposits in the domestic banks.
The ECB could probably cope with another 12 x €3bn of replacement funding in 2011 if other Euro banks stay stable but isn’t that the worry? That the ECB does not have infinitely deep pockets (or at least not if it wants to keep inflation under control)?
Like other commentators, I am not at all sanguine about the ECB’s ability to cope indefinitely. As you Namawinelake says, the amounts for Ireland are small, but a similar loss of confidence elsewhere would be more difficult. In the event of a run on the centre, do you think the testicles [sic] in Ireland would remain or shrink?
Seamus Coffey has pointed out that much of the deposit money being withdrawn from Irish banks is non-eurozone in origin. I haven’t found figures for capital flows to/from the eurozone (the ECB retains its astonishing ability to view capital flows as neutral). A sign of troubles would be a move of capital out of the eurozone or even a shortening of the term of external capital instruments (as we saw in Ireland with the NTMA moving to a treasuries program as long-term debt demand dried up (or at least refused to grow)).
While the current line is holding, extrapolation anything from current positions without doing a risk weighting is, as we’ve seen in the last four/five years a fools game. That emerging-market type loss of over-investment and crises of confidence have only happened in small EEA economies (Ireland, Iceland and Greece) should not give confidence that it will not happen in larger economies. Who would have thought in 1998 that the Asian crisis would lead/feed/be fed from the Russian crisis?
Finally, I don’t believe that the ESCB is institutionally or mentally equipped to handle the consequences of the liquidity that has been provided to Irish banks. Is the system capable of admitting banks are insolvent (without continuing guarantees from near-insolvent states) and resolving them? There is little or no legislation to support them, they have no experience of doing it and, currently, they do not want to do it.
The possibility that Ireland may leave the euro is worth taking seriously. Should it ever come to the point where the ECB is rescuing depositors here, it may bizarrely be the opportune time to leave the currency default and devalue.