Post Tagged with: "bank run"

Tarullo: Shadow Banking and Systemic Risk Regulation

Tarullo: Shadow Banking and Systemic Risk Regulation

Below is the full text of a speech by Federal Reserve Governor Daniel Tarullo on regulation of non-bank financial institutions.

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Bank runs: who’s going to clean up the mess afterwards?

Bank runs: who’s going to clean up the mess afterwards?

By Frances Coppola In my post on the anatomy of a bank run, I suggested that the rule should be “provide central bank liquidity support to everything, taxpayer support to nothing”. This is because in a bank run/liquidity crisis, it isn’t realistically possible to distinguish between those institutions that are suffering from a disastrous shortage of liquidity and those that […]

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Anatomy of a bank run

Anatomy of a bank run

In my last post, I argued that enforced separation of investment banking and commercial banking would not eliminate the need to provide central bank support to investment banks and other non-banks in the event of another Lehman-type collapse. There followed an extensive discussion in the comments, in the course of which it became apparent that many people simply don’t understand how bank runs work. So I thought I’d explain.

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On claims of depositors, subordinated and creditors and central banks in bank resolutions

On claims of depositors, subordinated and creditors and central banks in bank resolutions

Regarding Cyprus, recently I heard someone claim that depositors are not creditors of a bank despite the fact that deposits are bank liabilities. This is bollocks. Depositors are indeed creditors, particularly in Europe where they are legally pari passu with other unsecured creditors. Below is an extract from a presentation given by an ECB expert on bank resolution schemes addressing who gets preferential treatment in carving up the losses.

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The EU Provision which will allow capital controls in Cyprus is Article 65(b)

The EU Provision which will allow capital controls in Cyprus is Article 65(b)

As I indicated three months ago, the IMF now supports capital controls in specific and extraordinary circumstances, particularly in view of its experience in Iceland. This is now relevant given the situation in Cyprus. Matina Stevins of Dow Jones has learned that EU and ECB officials are now working on a contingency plan for Cyprus which includes capital controls. Likely, they would go into place as soon as Cypriot banks re-open for business.

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The Cyprus Bank Deposit Bail-in

The Cyprus Bank Deposit Bail-in

This morning we learned that after hours of tense negotiation, Europe has hammered out a 10bn euro “bailout” of Cyprus. I put the term bailout in quotes because the key feature of this deal is the bail-in of Cypriot depositors to the tune of 5.8bn euros. This means that depositors went to sleep on Friday night and woke up Saturday to find that their money, deposited safely in Cypriot banks had been seized and used to “bail out” the country. I see this as an extreme measure which, if the European banking crisis continues, will have very negative implications for bank depositor confidence in other European periphery countries.

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All Hail Mario Draghi: The Spanish Bank Run is Over for Now

All Hail Mario Draghi: The Spanish Bank Run is Over for Now

The Spanish bank run caused by redenomination risk is over. And Spanish bond yields are now back to around the 5% level today. Apparently, the ECB’s monetisation scheme has worked – and without Spain’s having entered a Troika program yet too. That tells you how important currency sovereignty is. Let me spell out what’s happening here and why with a few thoughts on how things will proceed going forward.

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On the continued European deposit flight

On the continued European deposit flight

Yalman Onaran has written up a lengthy review of the deposit flight now ongoing in Europe. It is a reminder that Mario Draghi’s plan to backstop Spanish and Italian sovereign debt can only do so much to stop redenomination risk, the purported worry of the ECB in intervening. A total of 326 billion euros ($425 billion) was pulled from banks […]

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TARGET2 replacing other sources of funding for Bank of Spain

TARGET2 replacing other sources of funding for Bank of Spain

It is clear that lending to Spanish banks is now funded entirely via TARGET2 (borrowing from the rest of the Eurosystem) rather than with deposits. In fact deposits at the Bank of Spain by the Spanish government and Spanish banks (excess reserves) have been declining since the second 3y LTRO. These sources of funding have since been replaced by TARGET2, as the Eurosystem outside of Bank of Spain is now fully supporting the Spanish banking system .

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More on the euro disaster and current account imbalances

More on the euro disaster and current account imbalances

Many orthodox economists ironically adopt something close to a “loan pusher” argument: the excess global saving pushed interest rates down, leading to excessive borrowing by debtor nations that consumed beyond their means. Although the framework is somewhat different from the current account imbalance story, the conclusion is the same: too many imports flowing to heavily indebted profligate consumers. This can be supplemented with the mercantilist story—Germany is also guilty because it pushed cheap exports onto the importers. As I have tried to make clear, there is something to that but it is far too simple. The EMU could easily have self-destructed even with no current account deficits anywhere. And the US does not self-destruct in spite of current account deficits everywhere (internally and externally).

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The Growing Pain in Spain

The Growing Pain in Spain

Just when you think that things can get no worse in Spain, they do.

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Chart of the day: Net Target2 Balances in Eurosystem show capital flight

Chart of the day: Net Target2 Balances in Eurosystem show capital flight

The Target2 problem is really a manifestation of an accelerating bank run. I have said many times, this is my major concern, the bank runs and the resulting shrinking credit and likely deadweight loss that accompanies them.

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