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Running to the bank.

15 July 2008 1 comment

Retired member

I imagine there's a bit of fund juggling going on at banks across America. Given that only the first $100k is covered by federal deposit insurance it would be wise to spread your cash across a number of financial institutions to maintain insurance coverage in the event of a collapse of an individual institution.

Australia is not immune to the recent turmoil and at least one Aussie bank will be making some multi-billion dollar 'readjustments' in the near future.

I once looked at a risk scenario where banks were vulnerable to a run, just by virtue of the fact that they don't actually have much cash on the premises. Some institutions require advanced notice of withdrawals over a few thousand in order to make certain they have the cash available. Cash is pooled accross branches and institutions on demand. I looked at the possibility that a large number of peopl, either by design or coincidence, went to a particular branch and queued up to withdraw their money. It probably wouldn't take too many queuing up outside a branch and orders for cash delivery would be sent out. What might the effect be? Could enough people waiting outside a branch complaining about the bank not having enough cash, on a major thoroughfare in peak hour influence other customers or even those of other banks? Could it start a run? What if it was reported in the media? In todays climate it just might happen.

Trust is a fragile thing. Can we keep 'banking on' banks - especially when they don't even secure our funds anymore if we internet bank?

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Comments: (5)

Alexander De Lange Consultant at Aurelia Financial Consultants cc

16 July 2008

Dean: That's exactly how runs start, back in '29 and today. I guess the UK was lucky in that the Northern Rock queues did not spread too much to other banks, although I do understand that in some instances higher withdrawal rates were noticed. But it's an old story: you see a queue a bank, you 'run' to get your money out, right?

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A Finextra member

16 July 2008

For as long as fractional reserve banking exists any bank is a rumour and a day away from going out of business. If the average bank customer understood how the banking system operates they would demand higher reserve ratios.

I envisage a day in the future where customers will choose banks who opearte 100% reserve ratios - or just not keep their savings in a bank account.

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A Finextra member

26 July 2008

I notice that NAB are first up with a token on the table. Gently, gently don't rock anyone's ship. Which bank will be next to 'chip in'?

There is actually more to life than short banks, long oil and printing money.

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A Finextra member

31 July 2008

--------------------------------------

A voyage of discovery in the Southern Ocean and the good shippe Ozzybank sails with a fleet searching for a way to the riches of Asia.
"Captain! we're taking on water."
"It's only a splash from that big Yankee ship, We're immune"
"But it's flooding the hold Sir and slowing the ship."
"All hands to the pumps".
"We're having trouble making way Captain".
"Signal the fleet and make course for home, we'll stick to the coastal route for a while and stay in sight of land."
Days, weeks, months later.
"Captain we're taking on water!"
"What is it now?"
"Sir the bilge is flooding, every ?nth plank has sprung!"
"All hands to the pumps, don't alarm the passengers. Set course for the nearest place we can put her aground before she sinks!"
"Aaarrgh! My sailing days are over, it'll take a bold new man and a plan to capture those riches of Asia".

-------------------

Anyone have a bold plan?
Plan A - Do it better.
Blan B - Better do it (plan A).
Plan C - Carry on the quadrumvirate and the local protected status quo - FAIL.

I penned this little tale after my last comment but honestly couldn't bring myself to steal their thunder. The Captain has left the ship...and the ANZ has made their own readjustments. I'm still a little bearish on Aussie banks , if you know what I mean.

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A Finextra member

25 September 2008

The runs get to the street level.

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