No one has denied that China was overdue for a credit shakeout due to the Chinese government’s desire to stem excess credit growth as the economy rebalances. The question has always been about how much of a shakeout Chinese policy makers are willing to accept and how destabilizing the shakeout would get regarding economic growth and employment. We seem to be reaching another level in terms of jitters with bank runs and commodities sector bankruptcies. Some thoughts below
Tag: bank run
Below is the full text of a speech by Federal Reserve Governor Daniel Tarullo on regulation of non-bank financial institutions.
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 […]
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.
The European Union is an existential crisis because its crowning achievement, the single currency, has come under assault from all sides. The continued existence of the Euro has even been called into question as country after country within the euro zone has been forced into bailouts and austerity. The heart of the problem is, as elsewhere in the industrialized world, stems from the unseemly growth in private credit that preceded the financial crisis in 2008 and the private debt overhang that accompanied that credit growth, even in the aftermath of extensive asset price deflation. Put simply, many private sector households and businesses across the industrialized world are upside down, in negative equity, bust by common definitions of balance sheet solvency. And the result has been and continues to be crisis.
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.
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.
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.
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.
Yesterday I wrote a lot about this topic for Gold subscribers, asking “Will Merkel grant ‘austerity model’ Ireland retroactive bank recap mutualisation?” This post gives a full account of the European bank recap issue, so I won’t re-hash any of that here. Briefly, the issue is whether the Irish government will get debt relief for having bailed out its banks […]
Two weeks ago I told you that Spanish Prime Minister Mariano Rajoy’s humiliating defeat to Merkel had narrowed options to sovereign bailout, monetisation or default for Spain. Now that the Spanish bank bailout is unraveling and Catalonia is threatening secession, I want to revisit this theme. I believe the basic conclusions are the same but I want to update you with my […]
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 […]