Lessons from the Rock for Europe's banks

Sun May 27, 2012 10:08am EDT
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Steve Slater and Clare Kane

LONDON (Reuters) - In November 2010, rumors swirled through financial markets that Spanish bank BBVA (BBVA.MC: Quote) was suffering a run on its deposits. The share price fell before excitable traders realized they had made a mistake.

In fact the bank was holding a "fun run" in Madrid and customers had lined up outside its branches to get their T-shirts. In a jittery market, talk spread quickly and few things worry bank investors and customers more than talk of a run.

Nervous times have returned to the euro zone, and customers are worrying again about whether their savings are safe.

Banks, regulators and policymakers in Greece, Spain and across Europe are back on high alert to avoid a repeat of the most catastrophic risk for a bank -- a loss of confidence among savers, or a run on the bank.

A run may start irrationally, but once it takes hold the panic can be entirely rational. No-one wants to be last in line if everyone else is pulling out their cash.

A run on Britain's Northern Rock in September 2007 was one of the most sudden and shocking events of the financial crisis.

It was the first run on a British bank for more than 100 years and critics said it made the country look like a banana republic. Yet it is providing lessons on how to limit the damage in future.

"The key thing to learn is that runs can happen out of nowhere and once they start they are incredibly difficult to stop. And to stop them you have to do far more than you expect, and to do it far more quickly than you expect," said Alistair Darling, Britain's finance minister at the time.   Continued...