Spanish bank run reflects EU policy response

The New York Times ran an interesting article that documents how the EU policy response to the financial crisis has contributed to the Spanish bank run.

Regular readers know that modern banking systems are designed to prevent bank runs.  Bank runs are prevented by deposit guarantees and access to central bank funding.

The deposit guarantees remove individual bank solvency risk and replace it with the solvency risk of the state.  So long as depositors think the government will perform on their guarantee, deposits stay in the banking system.

Access to central bank funding is critical as it provides the liquidity that the banks need to ensure that depositors can withdraw their money.

While a modern banking system is designed to prevent bank runs, EU policymakers have pursued policies that undermine this design at every turn.

First, EU policymakers have bailed out the banks.  By bailing out the banks, the EU policymakers use up the state's capacity to borrow.  This casts doubt on the ability of the state to perform on the deposit guarantee.

Second, EU policymakers have threatened to kick Greece out of the EU.  This has introduced forced currency conversion risk.  The risk here is that the depositors euros will be converted into far less valuable drachma or pesetas.

Having undermined the design of Spain's banking system, it is no surprise that the EU policymakers have managed to trigger a bank run.

“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.” 

Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain. 

In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone. .... 

“No doubt there is a little bit of panic,” said José García Montalvo, an economist at Pompeu Fabra University in Barcelona. “The wealthy people have already taken their money out. Now it’s the professionals and midrange people who are moving their money to Germany and London. The mood is very, very bad.”...

Setting off the flight was the failure of Bankia, which came as a shock to Spanish savers who had been assured by government officials that the bank was in good shape....

Under the FDR Framework, governments are never suppose to offer an opinion about the solvency of a bank.  Instead, governments are suppose to ensure that the market participants have access to all the useful, relevant information in an appropriate, timely manner to make a fully informed investment decision about the bank.

For banks, this information is ultra transparency and requires that banks provide ongoing disclosure of their current global asset, liability and off-balance sheet exposure details.

Still, as the examples of Mr. Vildosola and Mr. Pérez show, individual deposit flight is becoming more pronounced. 

Some people are willing to fly to London for the day just to open an account there, as most banks in the city require such transactions to be made in person. 

Spanish bankers working for British financial institutions say they have been hit with a barrage of questions about how to open savings accounts in London. 

“It seems as if everyone I know in Spain is getting on an easyJet to come to London and open a bank account,” said one such banker, who spoke on condition of anonymity, citing his company’s policy.