Europe
Banks Fear Flight of Deposits
LONDON—The
specter of funding problems is once again haunting Europe's banks
20
May, 2012
Even
after the European Central Bank pumped more than €1 trillion
($1.278 trillion) of cheap three-year loans into hundreds of banks,
the Continent's financial system remains vulnerable to the prospect
that stampedes of customers could yank their deposits from
institutions perceived as shaky.
That
threat was shoved into the spotlight last week when customers
withdrew more than €700 million from Greek banks in a single day.
The deposit flight, in response to the rising odds that Greece will
leave the euro zone, represented a dramatic escalation of two years
of a slow but steady flow of deposits fleeing the country's crippled
banking system.
Now
the concern among a growing number of policy makers, investors and
analysts is that banking systems elsewhere in Europe's periphery are
susceptible to similar crises. If that happens, policy makers and
central bankers would likely again have to rush to the rescue.
If
Greece leaves the euro zone, it will almost certainly restrict bank
customers from moving their money out of the country. That could
prompt depositors in struggling countries like Spain and Portugal to
think, "If it could happen in Greece, it could happen here,"
said Philippe Bodereau, head of European credit research at bond-fund
manager Pimco.
They
then might preemptively transfer their funds out of their countries
in order to avoid having their savings converted into rapidly
devalued Spanish pesetas and Portuguese escudos. "That's what
markets are starting to worry about," Mr. Bodereau said. "It
takes you to a whole different level of liquidity crisis."
Last
week, rumors of an exodus of customers from a large Spanish bank
prompted government and industry officials into the uncomfortable
position of having to deny that they were experiencing a bank run.
Meanwhile, British customers withdrew about £200 million ($316.4
million) from the U.K. arm of Spain's Banco Santander SA SAN.MC
+2.97% on Friday following a downgrade of the bank's credit rating
and amid worries about its vulnerability to Spain's problems,
according to a senior executive. The withdrawals represent only 0.2%
of Santander U.K. PLC's total deposits.
As
recently as two months ago, the European banking system seemed safe
from the threat of liquidity problems. The ECB's huge loan program,
implemented late last year to prevent banks from running out of
money, stuffed banks with enough money to refinance their maturing
bonds for all of 2012. But the combination of new fears that Greece
will leave the euro and the increasing fragility of Spain's banking
system has quickly ended that honeymoon.
After
a three-month market thaw, European banks once again are largely
locked out of public funding markets. Thanks to the ECB loans, the
banks can weather such a shutdown. But they are less prepared for
mass withdrawals of deposits, analysts and investors say.
Seeking
to defuse that threat, some European Union officials have been
considering the introduction of a pan-EU plan to guarantee bank
customers' deposits, say people familiar with the matter. Such a plan
would complement national guarantees already in place. It is unclear
how developed such plans are.
Aside
from anecdotal evidence, it is hard to tell what is actually
happening with deposits. Europe's central banks report data on
deposit flows only weeks after the fact.
One
reason investors and analysts are worried is because large portions
of bank deposits in Spain, Portugal and Italy can be withdrawn at
virtually a moment's notice. There is little to stop anxious
customers from transferring their savings from a bank in one EU
country to a bank elsewhere in the 27-country bloc.
In
Spain, whose banks are sagging under the weight of a devastating
real-estate bust, about 30% of the country's total domestic household
and commercial deposits are held on an overnight basis, meaning they
can be taken out at a customer's whim, according to the Bank of
Spain. In Italy, about 48% of domestic deposits can be withdrawn
quickly, as can 21% of the deposits of Portuguese individuals,
according to data from their central banks.
Citigroup
analyst Stefan Nedialkov last week estimated that banks in Ireland,
Italy, Portugal and Spain could quickly lose a total of €90 billion
to €340 billion of deposits if Greece leaves the euro zone, with
Spain bleeding between €38 billion and €130 billion. His
estimates are based partly on the deposit exodus from Argentina's
banks in its financial crisis in the early 2000s.
Those
figures represent nearly 10% of the countries' deposit base, the
rapid withdrawal of which would normally have disastrous
consequences. Some banks would run out of money and collapse. Even
the strongest would have to sharply curtail lending and dump assets
in order to conserve scarce funds.
But
Mr. Nedialkov reckons that such a deposit flight wouldn't necessarily
be a catastrophe. He saidthe ECB would likely come to the rescue with
a new installment of cheap bank loans, via a so-called long-term
refinancing operation, or LTRO.
Such
a move would be controversial, fanning fears that Europe's banking
system will become permanently addicted to central-bank lifelines and
unable to stand on its own. But given that the alternative could be
financial mayhem, "I think most people would prefer the LTRO
route," Mr. Nedialkov said.
Aside
from anecdotal evidence, it is hard to tell what is actually
happening with deposits. Europe's central banks report data on
deposit flows only weeks after the fact. In Greece, for example, the
magnitude of last week's withdrawals won't be clear until the Greek
central bank discloses monthly data at the end of June.
In
Spain, lenders are scrambling to soothe nervous customers and avoid a
Greece-type scenario.
In
Madrid, a manager of a branch of Bankia SA BKIA.MC +23.49% —the
troubled lender that the government is poised to bail out and that
has faced rumors of deposit withdrawals—said Friday that many
customers are asking questions about the bank's safety. "We tell
them we don't have a problem, that we are solvent," said the
manager, who would identify himself only by his first name, Jose
Manuel. "They leave feeling reassured."
As
she was leaving the Madrid branch, Dolores Saez Gonzalez said she
understands Bankia is troubled, but she isn't worried about her
money. "I think it is a secure bank," she said. Another
customer, Carmen Morales, isn't so certain. "I don't have much
money anyway," said Ms. Morales, who said she hasn't worked for
five years. "But if I did, I'd think about taking it out."
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