The myth of an increase in deposits signaling a restoration of confidence in Irish banks

Not surprisingly, after 12 months of declining deposits, the Irish government is claiming that an increase in Irish bank deposits during the month of August signals a restoration of market confidence.

Let's investigate the details of this reported deposit increase and see if it supports the restoration of confidence claim.

As an Irish Times article reports,

The figures, published yesterday by the Central Bank, show the total deposit base of all banks located in Ireland rose by just over €2 billion between July and August to stand at €579 billion. 

In August 2010, just before a de facto run on the banking system began, deposits were more than 50 per cent higher, at €893 billion....

The August rise in deposits, though small relative to the overall size of the deposit base, was more notable in that it took place in a month of panic in financial markets....

A breakdown of the figures show Ireland and other euro area residents accounted for the rise in deposits in August. Non-euro area residents continued to withdraw cash. A further breakdown of Irish residents’ deposits shows households reduced the amount of cash they held in banks in August by €556 million. The total stood at just over €91 billion. Irish non-financial companies increased their deposits by €339 million in the period to stand at €31 billion.

Apparently, individuals are still not convinced of the safety of Irish banks as both Irish and non-euro area residents reduced their deposits.

An Irish Independent article offers a slightly different view of the increase in deposits.

IRISH individuals and businesses are now more likely to pull their money out of foreign-owned banks than bailed-out Irish institutions, fresh data from the Central Bank shows. 

This would reflect what is happening in the rest of the EU with its sovereign debt and bank solvency crisis as oppose to a restoration of confidence in Irish banks.

Irish depositors are faced with two equally flawed choices.  Since there is not detailed disclosure of each bank's assets and liabilities, nobody knows if any of the EU or Irish banks are solvent.  As a result, the choice becomes do you pull your money out of the most recently re-capitalized banks or out of the banks that are about to be re-capitalized.

The real question is what are the depositors who are non-euro area residents doing.  They have the option of moving their deposits out of the EU and Irish banking systems to a non-EU banking system that appears more solvent.  Based on the numbers reported, that is continuing to occur.

The trend was revealed in new data showing private-sector deposits in the 'covered' banks fell just €342m in August, while the 'other' domestic banks suffered a fall in deposits of about €1.3bn....

Some industry sources fear buoyant deposit performance may have reversed again in September, as increasing speculation about the future of the euro prompted savers to take cash out of bailed-out and foreign-owned banks alike.

Which would further confirm that in the absence of detailed disclosure of each bank's assets and liabilities, confidence has not been restored.