More Bank Runs Coming

Northern_Rock_QueueAfter last week´s decision by HSBC to halt its policy of not honoring large withdrawal requests by depositors comes news of the Russian bank “My Bank” implementing its own run-protection measure.

“My Bank”, one of Russia´s top 200 lenders by assets, has introduced “a complete ban on cash withdrawals until next week.” In my discussion of HSBC´s similar policy here, I note that limiting redemption requests has been a measure to help fractional-reserve banks remain solvent since, well, the advent of fractional-reserve banking.

Today there is almost no place to hide. Since all banks are guaranteed by their central banks or deposit insurance agencies, they are all motivated to participate in creating liquidity against their deposit base. Since no bank will go bankrupt provided that the central bank honors its guarantee to support it, one might ask why banks (like HSBC or My Bank) are turning to alternative measures to ensure their own liquidity.

In Deep Freeze, Philipp Bagus and I discussed a practical problem that sheds light on these recent private initiatives limiting deposit redemption: the size of the problem (not enough good quality assets to cover the deposit liabilities of banks) is at least an order of magnitude larger than the ability of the central bank or government to fix. In Iceland´s case, there were almost no foreign exchange reserves available to guarantee deposit accounts held by Icelandic bank subsidiaries in faraway lands.

Even printing just the amount of money needed to honor the liabilities of the domestic deposit accounts is not only economically damaging (as Iceland saw) but also politically difficult to implement – who wants to live with the inflationary hangover caused by the amount of new money the central bank would have to create to make the banking system whole again? I don´t see anyone lining up to move to Zimbabwe, after all.

Maybe the recent private policies to guarantee their liquidity are a sign by banks that the size of the problem is bigger than the solution put in place to date. Deposit insurance might stop a run for so long, but sooner or later even it can run out of funds.

(This post originally published at Mises Canada.)

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