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Irish Banks Get The Runs

photo: Andy MacMillan via Flickr

One of the often cited reasons why EU member states must remain in the euro zone is because a withdrawal from the monetary union would be likely to trigger bank runs. Well it seems that they are happening with the euro.

I have done two recent diaries that provide some background on the financial problems of Ireland and the euro zone.

Irish Financial Stew

Tar Babies of the Euro Zone

Allied Irish Bank suffers massive withdrawals

Ireland’s financial woes deepened today after its second largest bank revealed that an enormous outflow of funds during the year had tripled its reliance on central bank funding.

The bank admitted it was increasingly reliant on central bank funding after suffering €13bn of outflows this year, matching the large loss of funds reported earlier by the country’s largest bank, Bank of Ireland. In a gloomy statement, the bank, which is now more than 90% state-owned, said: “The outlook in our markets is uncertain with additional stress likely from the implementation of the Irish and UK budgets. We are carefully and thoroughly assessing these impacts and market conditions.”

Ireland’s present financial crisis is largely a result of having assumed responsibility for the nation’s banking system that continues to shudder under the impact of bad real estate loans. It appears that bank depositors are losing confidence in the ability of the government to protect their funds. The bulk of the withdrawals are coming from corporate accounts. It would appear that this move is something more calculated than rampant hysteria.

Bank runs and failures were a common occurrence during the great depression and periods prior to that. Depositors who didn’t get their money out before the bank failed simply lost it. The regulatory reforms and deposit insurance schemes that were established in the industrialized world have relegated such panics to third world countries. The great recession has brought the possibility back to countries that thought it can’t happen here.  . . .

It was the banking systems in the US and Europe with their real estate loans and flaky mortgaged backed securities that triggered the crash of 2008. The initial response of governments was to take steps to stabilize the banks. It is becoming increasingly apparent that the underlying problems that triggered the crisis have been papered over rather than fixed and that they are beginning to punch through the paper. In the US the emerging issue is the legal problems with real estate titles and foreclosures that has the potential to trigger another banking crisis. In Ireland where the banks have been nationalized it is the ability of the government to meet the liabilities that they have assumed. In France and Germany the problem is that the banks are over committed on flaky debt in the peripheral countries of the EU. While the specifics differ there appears to be a common systemic problem.

The Irish government is in marathon talks with a delegation from the EU/ECB/IMF. Gone are the days when the IMF’s primary function was rapping the knuckles of banana republics to bring them in line with the Washington consensus. They are now trying to keep the first world afloat. The initial response of the Irish government to the banking crisis was an effort to address a problem of liquidity. The assumption was that like other post WWII economic crises this one would pass on in a matter of months and that the task was to keep the lid on until that happened. It turns out that the real problem for the Irish banks is insolvency. They are broke.

The question is who is going to be on the financial hook for this mess. Will it be the depositors, the Irish tax payers, the tax payers of the other EU member states? Just letting them fail is probably not an option. We have a globalized financial system that is a house of cards. If it starts tumbling in one place it could well take the whole thing down with it. We saw that happening two years. It is happening in Ireland. That means that it can very well happen elsewhere.

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Richard Lyon

Richard Lyon