Sunday, May 20, 2012

Run on banks in Spain is very real

As Spain's banking sector continues to deteriorate, rumors are beginning to spread of a possible run on banks with depositors withdrawing some billion euros from a single bank.
The Telegraph: - The man's voice was scarcely a whisper, but the urgency in his tone was unmistakable.

"Will my money be safe here?" asked the customer, leaning over the counter in a central Madrid office of troubled bank Bankia. The weary-looking cashier nodded. "Things are better now," he said quietly.

As Spain reels from a week of plunging stock markets and eurozone nightmares, everyone in the country – and beyond – will be hoping that the cashier was right.

On May 9 the government took over Bankia, the country's fourth-largest lender, in an attempt to dispel concerns over the bank's ability to deal with losses related to the 2008 property crash. Bankia is itself a clumsy conglomeration of banks with serious exposure to bad property debt.
Don't worry sir, your money is perfectly safe at Bankia. Because "things are better now" that the Spanish government has taken the bank over. And there is no liquidity problem with the nation's banking system because Mr. Fernandez de Mesa said so.
The Telegraph (a different article): - "Spanish banks have plenty of liquidity. They've been funded for the next two years through the central bank so there's no problem of liquidity at all in Spain," Mr Fernandez de Mesa told the BBC this morning.

"We have had two LTR's from the European Central Bank so they are funded for the next two years."

He said the recent fears around the health of the country's banks were linked to their exposure to the property market.

Moody's last night cut the ratings of 16 Spanish banks, citing the reduced ability of the Spanish government to provide support to the sector, as well as the "adverse operating conditions" characterised by a renewed recession.
Mr. Fernandez de Mesa is right. The ECB's LTRO is keeping Spain's banks on life support. But as deposits flee, these banks have no other source of funding. Make no mistake about it - the Spanish banking system is in the middle of the largest run on banks it has experienced in recent times. The process may not look like the old pictures of hundreds of people lining up outside a bank branch to collect their cash (as the Great Depression era photo above shows). With electronic transfers across the Eurozone, they don't have to stand in line. Even if the politicians and the bureaucrats lie about this issue, the numbers don't. Here is what Spain's run on banks actually looks like:

Source: ISI Group
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