In November 2010, rumours swirled through financial markets that Spanish bank BBVA was suffering a run on its deposits. The share price fell before excitable traders realized they had made a mistake.
In fact the bank was holding a “fun run” in Madrid and customers had lined up outside its branches to get their T-shirts. In a jittery market, talk spread quickly and few things worry bank investors and customers more than talk of a run.
Nervous times have returned to the euro zone, and customers are worrying again about whether their savings are safe.
Banks, regulators and policy makers in Greece, Spain and across Europe are back on high alert to avoid a repeat of the most catastrophic risk for a bank – a loss of confidence among savers, or a run on the bank.
A run may start irrationally, but once it takes hold the panic can be entirely rational. No one wants to be last in line if everyone else is pulling out their cash.
A run on Britain’s Northern Rock in September 2007 was one of the most sudden and shocking events of the financial crisis.
It was the first run on a British bank for more than 100 years and critics said it made the country look like a banana republic. Yet it is providing lessons on how to limit the damage in future.
“The key thing to learn is that runs can happen out of nowhere and once they start they are incredibly difficult to stop. And to stop them you have to do far more than you expect, and to do it far more quickly than you expect,” said Alistair Darling, Britain’s finance minister at the time.
“With what’s going on at the moment, it’s clear that many Greeks have taken their money out. If you’re not careful, a trickle can become a flow and it can then become an absolute torrent,” Mr. Darling told Reuters in an interview.
The dynamics have shifted, but there is now a greater risk that panic will spread to more than one bank.
“Northern Rock was a question about the soundness of the bank. Now the question is about the soundness of the government,” said Nicolas Veron at Brussels think-tank Bruegel.
“Then there is a related question – for countries that are at risk of leaving the EU, it could make sense to withdraw the deposits. It becomes a currency risk,” he said.
If Greeks fear their country could leave the euro, they may not want to keep their money in a local bank and risk seeing it devalued.
As a result, deposit insurance schemes can offer only limited support.
A guarantee helps, but not if there are doubts that the government can pay, and it doesn’t protect against currency redenomination, as in Argentina in 2001, when the value of deposits fell 20 per cent.
Reassuring customers they will not lose money and strengthening the deposit guarantee scheme is nonetheless the biggest lesson learned from Northern Rock.
“It came as a bolt from the blue and people weren’t sure of their protection, and then there was some spectacular and sensational media coverage. It was difficult to control,” said a person involved with events at that time.
Northern Rock was caught on the back foot when news of its problems were reported by the BBC late one Thursday night.
The bank, which had grown rapidly to become Britain’s fifth biggest mortgage lender, had needed emergency funding from the Bank of England a few days before, having been frozen out of wholesale funding markets due to a reckless business model.
The BBC report caused panic among savers, which got worse when policymakers were slow to reassure them.
Thousands queued outside Northern Rock’s branches from early that Friday, over the weekend, and on the Monday. When Mr. Darling stood up to tell people their savings would be 100 per cent guaranteed, the queues quickly disappeared.
Reassurance came too slowly and ministers were criticized for not doing enough to calm savers.
“Our lesson from Northern Rock is we let it run for three or four days, which was far, far too long,” Mr. Darling said.
“The problem was the government did not appear to be in control of events, and it wasn’t. It wasn’t until the Monday evening when I announced the formal guarantees that we were able to stop money leaving,” he said.
Although that slowed the visible run, deposits continued to be pulled from Northern Rock by online, postal and telephone customers in a so-called silent run.
About half of Northern Rock’s £24-billion ($38 billion) of retail deposits were estimated to have been withdrawn.
Other banks also suffered silent runs during the crisis, including Belgium’s Fortis and U.S. lender Wachovia, and in the modern era that is seen as the biggest risk for banks.
It may lack the drama of a High Street panic, but big amounts can move quickly and easily at the click of a mouse.
Britain and other countries have made the rules on compensation less complex and more generous, and banks now regularly communicate that. Four years ago, only the first £2,000 ($3,000) was fully guaranteed, and then 90 per cent of the next £33,000 ($52,000). Now it is 100 per cent of £85,000 pounds ($133,000), and other European countries guarantee a similar amount.
Consumers are more financially aware. During Northern Rock’s crisis, a branch manager was barricaded in her office after refusing to allow one couple to withdraw £1-million. Deposits are now typically distributed across more banks.
As well as being attacked for a poor communications strategy, British authorities were criticized for a lack of contingency planning, weak coordination between the Treasury, the central bank and the regulator, and lax supervision.
Risks at Northern Rock had been identified in “war games” held in 2005, but steps to address weaknesses were not taken.
But Mr. Darling said the Northern Rock crisis did mean the government acted sooner and more decisively a year later when Royal Bank of Scotland was on the brink of collapse.
“We were determined that we would not let it happen again, and this time we were dealing with big global players … we had no hesitation in taking the action we needed to do,” he said.
Other banks have suffered runs before and since Northern Rock, and more will in future.
“If people think that their money might be at risk, it’s entirely rational for them to take it out,” Mr. Darling said.
In 1933, President Franklin Roosevelt took drastic action to halt a series of runs on U.S. banks, successfully calming savers with an effective 100 per cent deposit insurance.
Greeks were last week rattled after the country’s president said savers had withdrawn €700-million ($875 million) in one day. That prompted a similar amount to be withdrawn the next day.
The exodus slowed, and there has been no sign of panic or queues at branches in Athens. But there had already been a slow run on Greek deposits – about €72-billion ($90 billion), or 30 per cent, has been taken out since the start of 2010.
A bigger worry is that Madrid’s banking crisis or a Greek euro zone exit could prompt an exodus from Spanish banks.
Shares in Bankia plunged last week after a report that €1-billion ($1.25-billion) had been pulled out by customers, forcing the government to deny the claim.
There has been no sign of panic in Spain, and the latest deposits data from its central bank showed a slight increase in March, although about €55-billion ($69-billion) has been withdrawn in the year to March, or 4.6 per cent.
But Santander’s British arm did see £200-million ($300-million) withdrawn last Friday after it was included in a Moody’s credit rating downgrade of Spanish banks.
Several local governments withdrew funds from Santander UK due to worries about its parent, Spain or the euro zone, even though it is an autonomous subsidiary and is self-sufficient in capital and funding, showing the risk of a run is not just about retail customers.
Britain’s local authorities are risk-averse after many lost millions of pounds held in Icelandic banks.
Plymouth City Council told Reuters it removed funds from Santander UK on Friday, while Kent, Oxford and Waltham Forest said they had taken out deposits and were reviewing the situation. John Simmonds of Kent County Council said he was reassured that capital could not be drained by its Spanish parent, but he was now “waiting for the fog to clear a little.”
At least five more councils, including Westminster and Middlesbrough, told Reuters they had stopped depositing cash with Santander UK in the last two years, due to Spain and the euro zone concerns.
Unlike four years ago, there was a swift reaction to quell any panic, and the Financial Services Authority confirmed no money could be sent to bail out the parent. Santander UK said activity returned to normal the day after Friday’s withdrawals.
With the euro zone crisis likely to drag on, there have been calls for a pan-European deposit scheme to reassure savers in countries like Greece. But that would fail to protect against currency risk and would probably face opposition in Germany, which does not want to pay for more problems elsewhere.