Quite simply, the run is not a function of depositors concern over the solvency of the banks. As your humble blogger has said many times, depositors do not care about a meaningless bank capital level.
The run is a function of the perception that deposits left in Greek banks will be converted into Drachma. A currency that will decline by 50% against the euro as soon as it is issued.
To avoid this loss, Greek depositors are withdrawing their money.
Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support.
President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma.
He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6.
Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.
"This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said....
The crisis is replicating the pattern of fixed-exchange ruptures through history.... Greek banks have lost 30pc of their deposits since late 2009. The total fell to €171bn in March.
"The surprise is that there is still so much left. I can’t believe it will stay much longer," said Simon Ward from Henderson Global Investors.As I have explained, depositors will keep their money in a bank so long as they think the deposit is explicitly or implicitly guaranteed by the government. When this guarantee is doubted is when the run on the bank occurs.
Now, the EU has managed to overlay the idea that not only is the deposit guarantee not good, but that good deposits will be replaced with Drachma that are worth half as much.
Given this situation, if you had deposits in a Greek bank, you would run to withdraw them too!
The ECB is holding the line with an estimated €100bn of Emergency Liquidity Assistance (ELA) for lenders, channeled through Greece’s central bank. Supplicants must pawn their loan book in exchange.
"The risk is that banks will run out of collateral since these are low quality assets with haircuts of 50pc or more. The ECB could relax the rules but they would have to take an active decision to do so," said Mr Ward.
JP Morgan said Greek banks have already exhausted their collateral.
A refusal by the ECB to ease rules would amount to expulsion, forcing Greece "to issue its own money."
The ECB said it had stopped routine operations with certain Greek banks with depleted capital buffers, but underscored that they are still able to access the ELA scheme....
Julian Callow from Barclays Capital said the ECB risks grave contagion if it lets go of Greek banks....
Slow capital loss from Club Med is showing up in the ECB’s Target2 data. The central banks of Italy and Spain have built up liabilities of €279bn and €284bn, partly reflecting bank withdrawals. This is owed to Germany, Netherlands, Luxembourg, and Finland.
Italy’s banking lobby said foreign deposits at Italian banks were down 20pc in March. The good news is that the Libor-OIS spread -- the "stress gauge" for banks -- has not risen in this latest spasm of the crisis, suggesting that Club Med deposit flight remains modest for now.
That could change fast if a Greek exit shatters the sanctity of monetary union.