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On the Pat Kenny radio show on Tuesday morning, David McWilliams gave voice to a frightening national concern. Yesterday he put that concern in writing in the Irish Independent.
Are our savings safe in Irish banks?
David McWilliams said he was asked this question by a café owner in Kilkenny who was terrified about the security of his savings. The café owner said he was worried that his money wouldn’t be there in the morning.
What I thought was particularly interesting is that in neither his article nor his radio interview did he really answer this question. David McWilliams is an economic commentator of some note and I’m a fan. I read his articles, often marvel at the breadth of his knowledge and have great respect for his ability to distil complicated issues into concepts I can understand. However, by not answering this question, he frightened me.
I know well enough that the government has guaranteed our savings, and David McWilliams did say on the radio yesterday that savings were safe for now, but in his article in the Independent, he said that “massive financial aid from the ECB is the only way deposits will be safe”.
David McWilliams is not alone in being asked this. bonkers.ie is a business that lists and compares savings accounts, and we get asked this question too. I wish I could answer it with a robust “YES”. But I can’t. I’m not a banker and I just don’t know. I point to the guarantee, but I am also aware that when just one bank failure is costing us the equivalent of an entire year’s worth of tax receipts and our national debt is circa three times that with more to come, I just can’t see how a guarantee could hold up to a small run on one bank let alone a bank panic that affected the whole sector. If it were to happen, we’d need assistance from none other than… the ECB.
Another question we get asked is whether putting money into foreign owned banks will make our savings save. This is a terrific question and really shows the level of Irish people’s concern for their savings. It’s like asking Rabo Bank (for example) if entrusting our euros to them will magically turn them into Dutch euros. The thinking here is that if we have our savings in an overseas bank, they’ll be away from the clutches of the Irish government, and safe from a run on the Irish banks. I’ll take a look at this a little later on, but first:
What are the scenarios that may stop us from being able to get our cash? There are a number of them, but these are the two biggies:
A run on Irish bank(s)
This could have happened in September 2008. On the Joe Duffy show, a conversation about the security of An Post led to a conversation about the safety of deposits in Irish banks and then the people started calling in to say they were withdrawing thousands from their banks in cash and bringing it home to bury or stuff in their mattress. A minor panic ensued, Brian Lenihan was forced to contact RTE and later a senior (unnamed) bank executive said that the show was RTE’s single most destructive broadcast ever. I read this to mean that many people actually arrived at their banks demanding their savings in cash.
A bank run does not need to be based on facts. It’s a perception game. If people think that their bank is almost insolvent, they may rush to get their cash before the bank goes bust. Once a run gains momentum, it becomes a self-fulfilling prophecy. Even people who don’t believe that the bank has a problem will often try to withdraw their cash because they feel that a run will create the problem. Banks simply don’t have enough cash or liquidity on hand to pay out all their depositors on demand so they have to call in loans early, borrowers can’t pay and the bank becomes… well… bankrupt.
If there’s no bank you can’t get your money. And nobody wants to find out how the government guarantee will actually work when thousands upon thousands of people have been unable to withdraw their savings from their bank.
A prevention of withdrawals
This can happen when there is a bank run or panic. To stop the flow of cash from the banks, the government limits customers’ ability to withdrawing their funds. And don’t think this is something from the great depression. It happened 9 years ago in Argentina. There, citizens were prevented from withdrawing their cash and given a tiny weekly cash ration. It led to years of protests, riots and instability.
So is David McWilliams right?
I believe he is. The protection of individual deposits is the single most important issue in this giant mess. A ripple of fear the likes of which McWilliams discussed could escalate into a panic and there is no way, government guarantee or not, that already insolvent Irish banks and a government with zero credibility could cope with one. There is no trust whatsoever in the Irish government. The people have been lied to to such an extent that they have no reason to believe the government when they say that their savings are guaranteed.
We Irish citizens have circa €175 billion in our banks. If there were a panic it would require intervention from the ECB. And of course we all know who’s in Dublin today. The likely outcome, according to Governor of the Central Bank Patrick Honohan should be a loan of tens of billions or euros.
From a nationalistic point of view, this is horrific, but from a personal financial perspective it’s should be a considerable relief to the ordinary citizens of Ireland. Why? Well, there seems to be a silent but growing reduction in the amount of money we’re keeping on deposit with Irish banks. Total private deposits fell by a 0.1% in July, 1.9% in August and 3.6% in September. That 3.6% represents almost €2.7bln and is the single biggest shift in our deposit total in the last year. I don’t think it’s recession related. Despite the awful economic events of the last few years, Irish people have continued to save steadily. This represents the first time we’ve seen sustained month on month reduction in our overall deposits for years. So where is this money going? Hopefully not into mattresses and holes in the garden (but I wouldn’t be surprised if it was).
When the national deposit figures are available for October and November, it will be very interesting to see if this trend has continued and whether it will slow with the arrival of the ECB. These sustained reductions in our deposits should certainly not be seen as a run, but perhaps the trickle that could have turned into the stream. Perhaps the October and November withdrawal figures will reveal a trend towards a silent run? And the ECB’s arrival is just in time? Well know soon enough.
At bonkers.ie, we’ve also seen a marked month on month increase in the number of people searching for deposit accounts, and people are clicking through to more foreign banks than they have in the past. I don’t think this is a coincidence – I think it’s the fruit of a national uneasiness.
Which brings us back to the question “does my euro become a Dutch euro if I put it into Rabo Bank?” Or does my euro become a UK euro (if there were such a thing) if I put my money in Nationwide UK? Not really, however these banks are regulated by their respective national financial regulators so in theory if the Irish government were to suspend or limit withdrawals, these banks should be immune from such an order… and you *should* be able to get at your cash.
Finally, to answer the question “are our savings safe in Irish banks?”
Yes, as of today I think they are. With the arrival of the ECB and Patrick Honohan saying that we’re looking at a bailout loan of many billions, I think the crisis is over… for now.