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Another complaint about deposits

17 May 2018
Richard Kemmish

A recent study from the Bank of Italy on social media and depositor behaviour renews my scepticism about deposits as a source of stable bank funding.


Regular readers will know that I am no fan of the favourable regulatory treatment of retail deposits as a source of bank funding. They just aren’t as sticky as they were or as regulators wish they were. This scepticism will be shared by anyone who actually saw the long lines of depositors outside their local branch of Northern Rock (I went to my local branch just to see it, the pictures don’t do it justice) or, for that matter have ever watched the film ‘It’s A Wonderful Life’ (released in 1946 but containing a wonderful scene where our hero is trying to placate angry bank customers: “You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house…”).

My scepticism was reinforced by a recent study for the Bank of Italy which analysed twitter comments to predict depositor behaviour (“Listening to the buzz: social media sentiment and retail depositors' trust”). We have all seen how media such as twitter can initiate or rapidly amplify rumours or political campaigns – whether they be of a bank’s solvency or infringement of a social norm. I believe it is only a matter of time before something on social media starts a run on a bank.

The fact that this study came from Italy was irrelevant. If anything, depositors in ‘core’ countries (do we still use that phrase?) are more likely to use online (therefore instantaneous) banking, have lower brand loyalty and are more likely to make economic decisions for reasons of conscience. (That is all just a personal opinion that I have no data to support. But it feels right, no?).

The counterargument, the brake that stops bank runs, was always deposit insurance. Don’t worry if everyone else is running for the door, your money is guaranteed by the government. But as we know, banks can be safer than the national governments that ultimately backstop the deposit insurance scheme (even when it pretends to be a purely private sector thing).

Which is why the Europe-wide deposit insurance scheme is so vital to financial stability.

Which in no way belittles the vast political difficulties in putting it in place at a time when European banks still have significant risks on their balance sheet. As a spokesman for the Bundesbank recently said, they don’t want to insure risks that have already materialised. Non-performing loans being the most obvious area of concern.

But, if you wait until there are no risks in the European banking system before guaranteeing depositors you are going to have a very long wait. And the value that you add with that guarantee will then be very little. And it does nothing to ensure that future risks do not emerge. If we focus on getting NPLs down to zero (won’t happen) what other risks are we ignoring?

Our regulators encourage retail deposits with friendly treatment in bank funding, but our politicians can’t give them the protection that would justify that treatment.

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