Running at banks

Today’s issue of The Economist has an article fears of bank runs in Europe.

Runs on banks are such serious things that you cannot expect any banker to tell the truth when his bank is threatened.    A large enough run would also impact a country’s money supply and that has to be a concern for all of us.

If a bank is unable to refund its deposits it is probably because its loans have gone bad.  It could also be because the banker has made some bad bets such as  on interest rate movements.

There is so much debt around that most of it, especially that of governments, will never be repaid.  The best that can be done is to keep rolling it over.  There is a high probability that eventually a lot of people are going to lose their savings either from bankruptcy or inflation.

Deposit insurance schemes can protect against small problems – the banker who makes a bad bet on interest rates – but I’m not sure they can protect against the general widespread debt problem we now face.

According to the article one suggestion for Europe is greater financial integration.  This could delay the crisis but would probably bring everyone down at the same time.

 

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One Response

  1. Banks with bad loans can still survive if they have plenty of liquidity. It is not the nature of the balance sheet but the liquidity ratio which governs the survival of the bank. And the two are not necessarily connected.

    The next requirement is the faith of the depositors in the survival of the bank. The major influence is the liquidity ratio, but a government deposit gurantee certainly helps.

    Government TARP style repayment of bank debts are not necesary and a swindle perpetuated by banks.

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