Bailout

Worrying about a Greek bank run

By Felix Salmon

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.

Full post as published by Macroprudential on April 15, 2010 (boomark / email).