Wednesday, September 7, 2011

Europe's Banking System: A Slow Motion Bank Run in Progress?

Economist Kash Mansori in The Street Light takes a look at the slow motion bank run in Europe. Will the bank run soon pick up steam?

Last week The Economist described what it called a "slow-motion run in the funding markets" in Europe -- in other words, a gradual but steady run on European banks, as depositors remove their money from European banks and put it in places that are seen to be safer. It's worth taking a look at some data to see how significant this phenomenon is.

First, let's look at the troubled euro-zone perihpery countries. The following chart shows the total level of deposits with monetary financial institutions ("MFIs", which basically means banks and money market accounts) in Greece, Ireland and Portugal. For comparison, the total level of deposits within the entire euro-zone is also presented. (All data is from the ECB and is through the end of July 2011 unless otherwise noted.)

Ireland clearly stands out as having experienced a large net withdrawal of deposits over the past year. Perhaps surprisingly, banks in Greece have seen their deposits fall by only a relatively modest amount (about 10%) since the summer of 2010. And for the euro-zone as a whole, total deposits have been essentially flat.

But this hides some important details. If we compare the three most troubled periphery countries with other euro-zone countries, we find that Cyprus has actually seen the greatest percentage decrease in deposits since the start of 2010. But Germany has also seen total deposits shrink by a bit, and, perhaps alarmingly, even though it is not in the euro-zone, the UK has experienced a very significant fall in total deposits with its MFIs. (Note: UK data is through June 2011.)

See more of the story at The Street Light.

Geir Solem
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