Gavyn Davies: 'anatomy of the eurozone bank run'

In his Financial Times blog, Mr. Davies looks at looks the ongoing bank run in the eurozone and agrees with your humble blogger on the need to set up an EU backstop to the individual country's deposit guarantees.

A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers. 

The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s... After the crash, the establishment of the Federal Deposit Insurance Corporation was intended to ensure that deposit holders never again had to live in fear that their savings would be in jeopardy....

So what is behind the bank run in the Eurozone given that most of its members guarantee their banking system deposits?

In some ways, the withdrawal of deposits from banks in the periphery of the eurozone is simply a slow motion version of a rational bank run in the Diamond/Dybvig tradition. 

For example, deposits in Greek banks have fallen by about a third since the beginning of 2010. Deposits in Irish and more recently Spanish banks have also been falling. 

Depositors have been shifting their money to “safer” banking systems, notably those in Germany....

Safer in respect to the ability of the government guaranteeing the deposits to perform on its guarantee.

[They] probably fear the devaluation of their deposits relative to those in core economies if the euro should break up.... 

This a second fear that depositors have that is the direct result of EU policymakers.  They have adopted the posture that Greece faces a choice between adopting austerity to remain in the EU or leaving the EU to default on its debts.  Nowhere in the EU treaty does it say a member cannot stay in the EU and default on its debts (see Telegraph's Ambrose Evans-Pritchard blog).

So the perception of devaluation risk could be easily addressed by the EU policymakers.

Mario Monti apparently took a plan to the G8 summit to offer jointly-funded guarantees on bank deposits to apply across the entire eurozone.

As your humble blogger has suggested, this can easily be done by using the European Financial Stability Fund and the European Stability Mechanism as the backstop to the sovereign deposit guarantees.