What is the “bank run”, this threat which frightens banks?
FOCUS- The banking panic suffered by the Silicon Valley Bank shows that this phenomenon takes on a whole new dimension with new technologies.
After the fall of Silicon Valley Bank, fears surrounding the soundness of the banking system have multiplied in recent days. And with the famous risk of “bank run“. This term, translated into good French as “bank panic», consists in qualifying the panic of customers – households as well as businesses – who suddenly withdraw their money from their accounts. The only problem, and not the least, despite the phenomenal sums of money they manage, the banks cannot ensure the simultaneous release of all their customers’ deposits because they do not have the necessary liquidities.
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“The agents believe that their bank is in danger and they are afraid of losing their savings. It’s a crisis of confidence“, explains Christian de Boissieu, president of the circle of economists. By snowball effect, this situation can lead to insolvency and even bankruptcy.
In the case of Silicon Valley Bank, it was the rise in interest rates that set things on fire. Due to central bank reversals, the many US government bonds held by the banking establishment have seen their value plummet. Faced with a risk of fragility, and on the advice of well-informed investors, many start-up clients of the establishment have begun to withdraw their deposits. “SVB was in a vicious circle, the bank had to liquidate part of its portfolio to meet the deposits“says the economist and professor at the University of Paris 1 Panthéon-Sorbonne. But this at an amount lower than the initial purchase price. The establishment then suffered significant losses and customers continued to withdraw their money. SVB has “therefore could not cope with the withdrawal of deposits“, he underlines.
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In a way, the bank run is akin to a self-fulfilling prophecy. “The fact of anticipating the crisis of a bank, causes the crisis of this bank by the withdrawals“, describes Christian de Boissieu. On a larger scale, with the risk of contagion, “we can have a systemic crisis», especially if the bank is said to be «too big to fail that is, too big to fail. In the case of Swiss creditwhich suffered a sharp fall on the stock market on Wednesday, it “is too important to experience a real failureconfides the professor.
New technologies heighten risks
“The bank run phenomenon is as old as the worldexclaims Christian de Boissieu. Many episodes have taken place throughout history: in 1907, during the “bankers panicin the United States or in 1998 during the economic crisis in Argentina. In 2008, UK mortgage lender Northern Rock also experienced a brief bank run, which ended with a liquidity injection and a guarantee from the Bank of England.
Except that today, depositors no longer line up in front of distributors to collect their money. “With the internet, in one click customers can come and withdraw their savings from a bank or change themexplains Christian de Boissieu. An observation shared by the economist Joseph Stiglitz: “It’s much easier to withdraw all your money and put it somewhere else“. The Nobel Prize even believes that “new technologies promote bank runsand think that “the stability of the financial system must be rethoughtin light of these changes.
For a “bank run», «it doesn’t take much, a simple clumsy statement can be enough…underlines Christian de Boissieu. “There can be a ‘bank run’ phenomenon as soon as there is a crisis of confidence. But it won’t go very far“, however, reassures the economist.
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A risk for Europe?
In terms of standards, the Old Continent applies Basel III rules to secure and supervise the banking system in the face of such risks. The international agreement concluded in 2010 requires banks to respect liquidity ratios. Unlike the United States, this European regulation applies to all banks, “whatever their size“, specifies the president of the circle of economists. What to remove more possible dangers.
Moreover, as in the United States, a second instrument exists: the deposit guarantee system. In the event of default by a bank, a customer is covered up to 100,000 euros (compared to 250,000 euros across the Atlantic). In the case of SVB, “the authorities said they did not take the ceiling into account, which calmed things down», specifies Christian de Boissieu, before concluding: «In the event of a crisis of confidence vis-à-vis a bank, they have enough to deal with it“. Something to reassure depositors.