Although the adjacent questionnaire is facetious, it does ask the right questions. If youāre a wealthy European depositor today, what do you do with your money? Do you really continue to keep cash in a Greek or Italian bank account?
European bank depositors all face a tough decision today ā to withdraw their deposits, or not withdraw and take their chances. Their response to that decision may determine the financial future of the Eurozone. Since 2008, EU Government bailouts have transformed a traditional banking crisis into a full-blown sovereign crisis. The European Central Bank (ECB) has managed to keep the Eurozone banking system going for now, but the constant threat of depositor bank runs makes its future extremely uncertain. A bank run on deposits forces banks to liquidate assets to raise cash. Governments and central banks will go to extreme lengths to avert such a scenario, because a liquidation reveals what an asset is really worth ā and they are likely worth far less than what the banks are claiming theyāre worth on their balance sheets today.
Bank runs have wreaked havoc in Europe over the past three years. In Iceland, it was a UK-led bank run on its second largest bank, Landsbanki, in early October 2008 that led Landsbanki to block over 300,000 UK depositors from accessing their accounts in its online bank called Icesave. Fear of widespread deposit losses compelled the British government to promptly freeze the assets of Landsbanki in retaliation, inciting an effective lock-down of foreign capital in and out of the country.1 You certainly didnāt want to have an Icelandic chequing account when that happened ā especially considering that the Icelandic Krona proceeded to lose 58% of its value by the end of November 2008.2
In Ireland, it was the withdrawal of almost ā¬4 billion in deposits in less than three weeks that compelled the Irish government to nationalize Anglo Irish Bank in January 2009.3 Large depositors lost faith in the Irish governmentās bank account guarantee and began to pull their cash out of Irish banks in droves. As a Trinity College Dublin professor was quoted at the time, "This is a nightmare scenario for the [Irish] governmentā¦ they canāt stop further withdrawals from the bank unless we close the borders and turn into Cuba."4
Ireland experienced a second bank run in late 2010, when more than ā¬67 billion was withdrawn from Ireland-based institutions in October alone.5 Irelandās top six domestic banks, two of which are currently in the process of being shut down, have now lost more than ā¬90 billion in corporate deposits since the crisis began in 2008.6 And the withdrawals continue ā in May 2011 it was reported that Irish resident private-sector deposits had declined by 8.7% over the past 12 months.7 Private sector deposits from non-Irish Eurozone residents declined by 9.7% over the same period, while deposits from non-Eurozone residents were reportedly down 28.2%.8 Irelandās experience makes it fairly clear: when depositors sense danger, and they are free to move their money elsewhere ā they typically do.
The Irish deposit withdrawals have left Irelandās banks in the hands of the ECB, which graciously bailed the country out back in November 2010, and has now lent Irish banks more than ā¬103 billion as of the end of June 2011.9 This, in addition to the ā¬55.7 billion the Irish banks have received from their own central bank, is amazingly still not enough to recapitalize the Irish banking system, which at the time of writing still requires an additional ā¬24 billion of capital to remain solvent.10
In Greece, bank withdrawals have proven equally as damaging. Greek banks have seen deposit outflows of around 8% thus far in 2011, with an acceleration of outflows in May and June. Moodyās recently warned that such flows could cause a "severe cash shortage if they rapidly increased beyond 35% of deposits".11 Last weekās ā¬109 billion bail-out suggests that may have already happened.
Just as with Ireland, the ECB has kept the Greek banks afloat, funding them almost ā¬100 billion in 2010 and an additional ā¬103 billion thus far in 2011.12,13 The recent bail-out will buy Greece time, but deposit outflows could still derail the ECBās efforts to save the Greek banking system if they continue unchecked.
