October 7, 2008

UK Bank Clients Making “˜Silent Runs’ On Deposits

During the Great Depression between 1929 and 1933, banks were hit by a series of runs demonstrated by the lines of people waiting to salvage as much cash as they could.

Now, as many banks face bailouts and seizures, analysts have noticed a new trend of "silent runs" by depositors whose assets exceed guaranteed levels.

In Europe, as homes and businesses increasingly manage their finances online, mass withdrawals may be invisible.

Fortis became the focus of a cross-border rescue recently after it fell victim to a silent bank run, which contributed to its decline and lead Benelux governments to step in and help.

"If Fortis were in trouble, I would transfer my money over the internet to my parents' account," student Frederique Schilte said outside an Amsterdam branch, where she had gone to drop off a bill payment.

Fortis said it had lost about 3 percent of its deposits since the beginning of this year, both from consumer and business clients, or about 5 billion euros ($7 billion).

"Big amounts were withdrawn by private and business clients, particularly in Belgium," said Tilburg University Professor Sylvester Eijffinger, who is also an economic policy adviser to the Dutch parliament. "The capital supplied (by Benelux governments) was gone and they had to act quickly."

The intervention seemed this week to have worked.

"We were worried last week, but now that it is now part of the Dutch government, we are staying with Fortis," said a Dutch customer who declined to give her name but said she and her husband have been Fortis customers for 28 years.

Last September, when Britain's Northern Rock lost public confidence, it suffered the first run on deposits of a major British bank in more than 140 years.

The major damage was done by withdrawals by internet, postal and telephone customers. Almost 14 billion pounds ($25 billion) of savings were withdrawn from Northern Rock from the start of the panic until the end of 2007, more than half its retail deposits.

About one-third of the cash pulled out was at branches, but the remaining two-thirds, or almost 10 billion pounds, was taken out by non-branch customers.

When done online or by phone, a run can withdraw large quantities of funds in less time.

This is one of the concerns behind recent scrambles by governments in Europe to increase depositor sums under guarantee. Ireland and Denmark have offered blanket guarantees to savers, and pressure is mounting on others to follow.

Banks have always lent more than their clients hold on deposit, leaving the risk that none would have enough cash to pay out if they all turned up at once. Back in the 1930s, depositors faced losing all their money if a bank collapsed.

Attilio Vianello, now 98, remembers how in the 1930s he had just started a job at Credito Veneto, a small bank based in Padoa, Italy, as the crisis spread beyond Wall Street to Europe.

"Banks were going bust from one day to another and the vast majority of people did not manage to rescue their savings because once they knew, it was too late. They would find the doors already shut," he recalled.

The electronic equivalent of this would be a server failure, or a Web site shutdown. But executives point out that in any silent run -- made possible by electronic money transfer whether through the internet or wholesale networks -- the most damaging aspect is the speed at which business customers can move.