Sunday, May 27, 2012

Silent Run on Spanish Banks

I read somewhere recently that "bank run" is one of the top search queries on Google. So, I did some looking on Google to see what was happening in Spain, given the announcement of a bailout of the one of the major Spanish banks.

The LA Times has this to say today:
Investors are holding their breath for a run on Spanish banks, as depositors quietly worry whether their money is safe. Electronic transactions are up slightly, with money flowing from smaller Spanish banks to larger ones, and even to accounts outside the country, though the volume is far less than in more deeply troubled Greece.

. . . On May 17, Bankia's shares temporarily lost nearly a third of their value after a Spanish newspaper reported that more than $1 billion had been withdrawn from the bank in the previous week. In a hastily called news conference, the government denied that there had been a run on the bank, and shares recovered some, but not all, of their losses.

. . . The Standard & Poor's ratings agency also announced downgrades late Friday of five Spanish banks, dropping the credit ratings of three, including Bankia, to junk status. All five are cajas, community banks, which are required to invest depositors' money in local development projects with supervision of local politicians.

When Spain's housing and job markets collapsed, the cajas were hit hardest because they specialized in construction and real estate lending, and their investments were not as diversified as those of national or global banks. The previous Socialist government's strategy was to force mergers of small cajas, combining their assets to try to strengthen them against losses. Instead, the result in most cases was simply bigger banks with bigger debts.

Bailing out Spain's entire banking sector, and the cost of insuring its $1.25 trillion in deposits, would far exceed the price tag for rescuing smaller Greece. Spain would almost certainly need international aid to do so. The question is how many banks — what proportion of the entire banking system — Madrid could manage to prop up on its own.

Markets probably will deliver their verdict on Bankia's bailout when trading resumes Monday in Europe, and a day later in the United States, after the Memorial Day holiday.
The problem is that bank runs are harder to see today than in the past. Rather than long lines of people queuing up to withdraw cash, its easy to transfer the money electronically to different banks, or even different nations. Particularly so, because of the common currency.

The New York Times discussed this issue a couple of days ago in this article. It reported:
Ángel de la Peña, a Spanish government worker, is seriously considering the once unthinkable: converting some of his savings from euros to British pounds.

Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporate counterparts across the country are similarly looking for safer havens by transferring their spare cash to stronger euro zone countries like Germany “on a daily basis.”

It is only a trickle so far, and not nearly enough to constitute a classic bank run. But these growing transfers of deposits out of troubled Spanish banks reflect a broader fear that the country’s problems could make it hard for Spaniards to get to their money if banks fail and cannot be supported by the government. In a worst case, some even worry their money will be worth substantially less if Spain is forced to leave the euro currency zone and re-adopt its old currency, the peseta.

Money already has been pouring out of banks in Greece, where many citizens believe it is increasingly likely that their country will be forced to leave the euro zone. But for European policy makers and economists, the possibility of mini-runs on banks spreading from Greece to other, bigger countries like Spain — with 1 trillion euros, or $1.25 trillion, in bank deposits — poses a much more serious risk. Indeed, the outflow of money from Spanish banks could increase if the ratings agency Standard & Poor’s, as expected, downgrades Spanish banks, in effect saying that their weakened state makes them riskier.

The havoc that a stampede might cause to the Continent’s financial system would greatly complicate efforts by European Union officials to fashion a longer-term plan to ease the debt crisis and revive Europe’s economy, because authorities would have to cope with the staggering added costs of shoring up banks.

“A bank run can happen very quickly,” said Matt King, an expert on international fund flows in London for Citigroup. “You are fine the night before, but on the morning after it’s too late.” It was a similar liquidity crisis on Wall Street in September 2008 — which started with nervous investors pulling money from troubled institutions, then quickly from healthier ones — that set off the financial crisis.
The article goes on to note:
In Greece, more than two years into its financial crisis, nearly one-third of the country’s bank deposits have already left the country.

There has been no such exodus in Spain so far, where over the last year about 4.3 percent of bank deposits, or 41 billion euros, the equivalent of about $51 billion, has been transferred out of the country. But that amount is in addition to a decline of 140 billion euros in foreign-owned financial assets in the last year, like the sale by foreigners of Spanish government bonds.
As you probably heard, Jim Cramer appeared on Meet the Press last Sunday, and stated: "I'm predicting bank runs in Spain and Italy in the next few weeks. Without coordinated policy there will be financial anarchy." (Source, with video, here).

The real information you would need is unavailable. That would be watching what the people in the know--top bankers and politicians--do with their money. However, unlike Argentina, you won't see people flying out of the country with suitcases crammed with foreign currency. As I indicated, it will be subtle--electronic transfers, mostly. And, of course, the banks and the government will say everything is fine right up until the point that they freeze the accounts.

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