The Looming European Bank Run

When is a bank run not a bank run?

Spain and Greece have, as the charts below will attest, been facing an exodus of cash from their banks for the past year and a bit. Some €50bn of Spanish bank deposits have left the country since last January, while Greece has seen over €40bn leave its shores (mostly for French and German banks).

Source: ECB/Jefferies

Now, it’s worth putting this into context in two senses: first and most importantly, those figures slightly overstate the scale of the Spanish problem – after all the size of their respective banking systems are very different: that Greek outflow represents 20% of the country’s deposits, while that €50bn Spanish exodus is only 2.9% of its deposits.

Moreover, what we’re witnessing in Spain and Greece isn’t a bank run in the traditional sense – in other words what we saw with Northern Rock in 2007. It is an invisible outflow of cash from one country to another – something carried out not by normal households but by institutional investors and wealthy depositors who are in a position to shift cash overnight from Athens to Frankfurt.

Nonetheless, the real worry is something you won’t see in that chart, or indeed the one below, which shows the change in deposits in these countries only up until March – the last month we have statistics for.

The fact is that a bank run – visible or invisible – can happen very suddenly. As Alistair Darling said on Sky News just yesterday: “From my own experience these things can blow up within hours”. Just look at this chart from the National Audit Office, which shows you how fast cash escaped from Northern Rock during its run. In one day alone, it had more than £1.5bn of deposits leave its vaults – around 5% of its deposits.

That’s way more than the €700bn (0.4% of total deposits) that reportedly escaped from the Greek banking system on one day earlier this week.

But might that scale of bank deposit flight happen in Greece’s case? Probably not, so long as this remains an invisible bank run. The proportion of deposits in Greek bank accounts that are actually mobile – can be shifted from one country to another – is likely to be relatively limited. The majority is money deposited by normal citizens from their salaries. These people are far less likely to move their cash out of the country.

However, that’s not to discount the possibility of a genuine domestic bank run. Though Greek (or for that matter Spanish) citizens are for the most part consigned to keep their cash in the country, that doesn’t prevent them from withdrawing it from banks and stashing it at home. And that is the real risk facing both these countries.

There are already anecdotal reports of families withdrawing more cash from their bank accounts than normal. If that became a flood, then is the time to get really worried about the plight of their economies.