Economic News & Analysis—May 16, 2012Greece: Not a bank run, but maybe a bank walk?
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
As part of an attempt to persuade party leaders to form a coalition government, Greece’s president pointed out the precarious position of many of the Greek banks. On Monday and Tuesday of this week alone, depositors apparently pulled out more than 1.2 billion euros in deposits from Greek banks. While this is not a new phenomenon, it is an acceleration of the bleeding of deposits Greek banks have experienced since deposits peaked in January 2009.
In the U.S., there is a system of deposit insurance that helps reduce depositors’ fears associated with the security of the money they put on deposit. The deposit insurance system is a product of the bank runs that occurred during the Great Depression, when depositors feared for the solvency of their banks and wanted to be first in line to get paid. To fix that problem, the government guarantees deposits up to a limit through the Federal Deposit Insurance Corporation (FDIC). Banks pay a fee to the FDIC for the insurance, and the FDIC has a credit line with the U.S. Treasury for up to $100 billion, which provides even more firepower to assuage depositors’ fears. Additionally, the Federal Reserve serves as a lender of last resort to banks that are experiencing temporary liquidity problems. Combined, the FDIC and the Fed make it so bank depositors rarely think about whether or not their money is safe. Greek banks may be the polar opposite of U.S. banks.
In the European Union, there is also a system of deposit insurance, but it’s a bit more complicated since every country has its own deposit insurance fund. In 2008, member countries agreed to insure up to 100,000 euros in deposits. The Hellenic Deposit Guarantee Fund is Greece’s version of the FDIC. While U.S. depositors would be paid very quickly, it could take up to three months for a depositor to be paid in Greece. Also, the Hellenic Deposit Guarantee Fund isn’t backed by an institution like the U.S. Treasury, which severely limits the fund’s ability to raise money quickly if depositors begin a run on the banks.
As of March 2012, banks in Greece had approximately 174 billion euros in deposits, and the deposit insurance fund had approximately 3 billion euros in it. Greece’s deposit insurance fund could borrow from other deposit insurance funds in the eurozone if it were to run low on money. But if depositors fear that their banks might fail or that Greece might drop the euro and use the drachma instead, then it’s unlikely that the deposit insurance fund would do much good. The fact that Greek banks have any deposits left in them at all shows that Greeks aren’t expecting Greece to drop the euro as its currency. If that became the expectation, people would run, not walk, to get their money.