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| Police guarding the National Bank of Greece |
Amid Greece's current high-profile debt crisis, there has been a slow bank run picking up pace in the country. This occurs where the depositor's start to take their cash out of the bank, in the fear that the bank will become insolvent and lose the depositor's hard earned cash.
Bank runs are often talked about in the media as if all of them are catastrophic for the banking industry, and will most likely cause default by the incumbent bank and potentially causing contagion across all other banks in the country.
However a bank run is normally overstated and in most cases do not cause any banks to go insolvent. This is due to the different types of bank run:
When depositors start to withdraw cash from a particular bank that they believe is going under, the depositor can do 3 things:
1) They can put the cash back into a different bank in the country (For example taking money from Barclays and putting it into Santander).This is known as direct redeposit.
2) If they don't deem any of the banks safe, they could potentially take their cash out of the banks and buy government bonds (Lending money to the government). This is known as a "Flock to quality" and reduces any risks of the cash disappearing as a government is unlikely to default.
3) Stuff it under the mattress / change it to other currency (Typically Dollars)
In a typical bank run, the bank that has experienced the run will be solvent, and the bank run is more caused by scaremonger or media pressure and the bank is actually fully functioning. In this case, the other banks in the country that have received the funds taken out of the incumbent bank will likely make short term loans to the bank and this will increase their liquidity and allow them to run normally until the negative press has cleared.
This is known as "recycling money/direct redeposit"
However if the bank/banks are not solvent, like the bank run on Northern Rock at the height of the financial crisis, then it is very unlikely that other banks in the country will make short term loans and they will likely become insolvent and close.
If point 2 occurs and the banking industry is seen to be safe despite the run, then the people that sold the government bonds in the secondary market, will take this cash and put it in the bank. This is known as "indirect redeposit"
If 3 occurs, you have a big problem. Especially if the run is on all the banks in the country. This is what happened in Cyprus in 2012/2013 and this will usually lead to the government putting capital controls on the country. This allows only a certain amount of money to taken out of the banks and small amount of money to be changed up for other currencies.
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What is different in the UK?
The difference with the UK and many developed economies around the world with a solvent Government, is that they will guarantee savings by its population. In the UK it is up to £85,000 for single accounts or double if they are joint accounts.What this does is when a bank is in the media with potential liquidity problems but is still deemed to be solvent by experts, it prevents the population from being scared and running to the bank to take all their money. As they know that in the rare chance that the bank does close it's doors, the government will cover the cash that was lost by the bank.
These regulations came in after the Northern Rock bank run (Even though they were an insolvent business)
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Why the Greek bank run is so very different:
The Greek situation is much more serious than a typical bank run. Normally bank runs are due to specific problems with a particular bank or even fears over the industry and in many cases is covered by the government. However with Greece, there is a triple effect and three main reasons why the population want their money out of the banks.1) They have the typical scaremonger about the banking industry as a whole collapsing so want their money out.
2) Their Government is insolvent. This is completely unique to many other runs and they have absolutely no security that the Government could bail out the banks and save the depositor's money as they cannot pay off their own debt and are likely to default on their own debts by years end. This also stops money being taken out and exchanged for government bonds.
3) They are scared that should Greece leave the Euro, they would see a return of the Drachma (Greece's old currency). This is a problem as the population hold their wealth in Euros, and should they return, it is more than likely that the currency will devalue by up to 50%, which could potentially half the wealth of every individual overnight.
Therefore they are looking to take their money out of the bank and change it up for a safer currency like Dollars.
Should the country default, you could see a horrible situation whereby the country take its cash out of the banks, change it for dollars and have an insolvent Government which defaults on its debts and insolvent banks which can't pay off its debts that are now more expensive (due to it's debts being in euros). This would therefore be a case for capital controls which would see the population lose a substantial proportion of it's wealth.
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Conclusion: Typically you can see that your average bank run is nothing to worry about as it could see savers not losing a penny and in most cases the bank continuing to operate through the mechanism of direct or indirect redeposit.
However in a severe case like Greece, things could be disastrous and this is the poster boy example for why the media and the population are so scared about bank runs!
