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Then It Got Much Worse Of course, when you hold money in a bank and you hear about friends or family taking their money out, you start to worry. Eventually, you also do the same, tell your friends about it, etc. And why wouldn’t you? There’s much more to lose by having your money in a Greek bank than having it an ultra-safe German one. The major issue started though when residents in the much bigger Spain and Italy started to feel the same way. Add to that the fact that Spanish banks have been known for holding very shaky real estate loans on their books for much more than they are worth and you can see how dozens of huge banks have been facing liquidity issues.
That is another vicious cycle. Once news starts reporting such liquidity issues, other banks stop issuing short term loans to those banks, more clients withdraw their funds, etc.
Where We Are Now Even these days, the so-called peripheral banks are losing nearly $1B in deposits every day. You don’t need to be a rocket scientist to know that this spels major trouble. The countries involved such as Spain, italy and Greece do not have enough funds to bail out their own banks so they depend on international or European institutions in order to save their banks. Given the hundreds of billions required, it’s very much unclear how they will be able to get this done…
The Leverage Problem US banks were highly leveraged in 2008 which made the problems much worse. Europeans banks though are even more leveraged so the issue of having a run of banks (which the US did not have to deal with in 2008) could become much more problematic.
No Easy Solution A big part of the problem is that while Canadians and Americans have protection if their bank goes default, that is not so much the case in Europe. Since most of these countries are in a bit of a hole themselves, offering such a guarantee would be pointless. And it’s doubtful/improbable that a country like Germany would be willing to back such a measure…
It Will Only Get Worse I don’t see any reason for someone to hold funds in such banks or transfer back. That will make life very difficult for those banks, for local businesses and the economy, making things even worse for those economies. At some point, we will see citizens being unable to withdraw their funds from their banks which will create panic…
It’s already very ugly and I think it will get much worse..what are your thoughts?
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Moving money from one (Spanish) bank to another (German) bank is not a problem. The good bank grows and the bad bank dies. The system stays intact. In fact, the system improves.