Worrying about a Greek bank run

By Felix Salmon
April 15, 2010
David Kotok set the stage:

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I haven’t previously heard of Cumberland Advisors, a money manager in Sarasota, Florida. But they’ve been writing some great stuff on the subject of Greek bank runs.

First of all David Kotok set the stage:

Banks in Greece are experiencing runs in the billions of euros. Remember, depositors can remove their money and redeposit in another country in another bank and still do business in the euro. There are sixteen countries in the euro zone. The banking options for euro zone citizens are varied and abundant.

The bank deposit scheme in the euro zone leaves deposit guarantees in the hands of the national governments. In this case Greece is the guarantor. And since the country is in trouble because if its fiscal deficit issues, its banking system is also in trouble. That is because the strength of the national banks deposit guarantees are dependent on the strength of the government’s finances.

Could Greece go the way of Argentina or Iceland, he asked, where deposit insurance turned out to be worth very little? Kotok was ulimately sanguine.

But then Bob Eisenbels picked up the story in a fantastic entry yesterday, comparing Greece’s deposit insurance today to state deposit insurance in the US. The history here is not encouraging:

The US has had a long history, going back into the early 19th century, with decentralized state-sponsored deposit insurance systems that were not backed by the federal government. This includes the New York safety fund system; funds in Vermont and Michigan that were established in the 1800s; and funds in Oklahoma, Kansas, Nebraska, Texas, Mississippi, South and North Dakota, Ohio, Maryland, and Rhode Island that were put in place in the early 1900s. All of these programs failed within a few years. Most recently this happened to the Maryland and Ohio deposit insurance systems in 1985 and Rhode Island in 1991.

Eisenbels points out that in 1985 and even today, Ohio’s GDP is larger than that of Greece.

Bank runs are, by their nature, unpredictable things. WaMu suffered a big run, for instance, despite being FDIC insured, while uninsured customers at Citibank left hundreds of billions of dollars on deposit there, even as Citi teetered on the brink of insolvency. (Most of Citi’s depositors are uninsured, since most of its deposits are overseas.)

But there’s clearly a systemic risk to the Greek economy from bank runs, and it’s unclear how the EU is going to deal with this problem. Maybe there will start to be noises about an implicit EU backstop of Greece’s deposit insurance scheme — but I’m not sure that vague noises would suffice. I suspect that the main obstacle to a run is that Greece neighbors no eurozone country, and so it’s not exactly trivial for a Greek depositor to move her money to a non-Greek bank. Let’s hope that’s enough, for the time being.

Comments
7 comments so far

Felix,

Given your post, can you explain why non-euro area residents increased their deposits in Greek credit institutions in February (compared to January). In addition, why did deposits with maturity of more than two years increased while those with maturity of less than one year decreased?

Posted by ec436 | Report as abusive

FYI, it’s Eisenbeis, not Eisenbels.

Posted by Eric_H | Report as abusive

Eric, thanks, fixed.

ec436, I have no idea. Do you?

Felix – in the era of electronic banking it’s not clear that being physically a neighboring country would matter too much. Also, I’d assume that it’s possible for other EU banks to have branches in Greece. The question then is how deposit insurance works – i.e. is it based on the bank HQ location, branch location or the residence status of the account holder?

Posted by nicfulton | Report as abusive

The question is whether people expressing the greatest “worry” about a Greek bank default are sincerely worried, or just chewing the scenery in an endeavor to theatrically precipitate the Big Bad Default that may lend their naked swaps a Midas Touch.

I wouldn’t want to be in those hand-wringing rootless thespian’s shoes when the Eurozone comes out swinging against them, which is about an inch away from happening now.

Posted by HBC | Report as abusive

Hi Felix,
In Australia, where citibank operates and takes deposits, during the worst of the financial crisis, the Australian government insured deposits at citibank.

This may have been the same elsewhere.

Posted by duffsamoa | Report as abusive

Under EU rules, deposits at branches are covered by the deposit guarantee scheme of the country of the bank HQ. In the case of the Icesave branches in Amsterdam and London, the deposits should have been guaranteed by Iceland’s guarantee scheme. (the problem in that case is that the Icelanders have not paid anything to the depositors).
Subsidiaries, however, are covered by the host state system. So Greek depositors should check whether they deposit with a branch or a local subsidiary.

Posted by xav | Report as abusive
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