‘Mother of all bank runs’ has already begun in eurozone
Uncertainty over the future of the eurozone runs high, despite last week’s high-on-hot-air agreement on moving towards greater fiscal union. And that uncertainty is driving European banks into a severe liquidity crunch that could cause the region’s entire banking system to collapse, analysts fear.
The early warning signs of such a liquidity seizure are already showing up in the troubles that European banks face in raising short-term liquidity. French, Italian and Spanish banks have run out of collateral (typically US Treasures) that they put up to finance short-term loans, and have been forced to pledge their gold reserves in order to secure dollar funding, reports The Telegraph.
Some European banks have resorted to selling foreign assets to meet their capital requirements; others have cut back on their lending to industry.
Money is to the economy what blood is to the human body. So long as both are circulating smoothly, they’re doing fine. But when liquidity starts to choke in the veins of the economy, as is happening now, it points to a coming seizure. Which is the worry that keeps bankers and analysts up at night these days.
Investors are beginning to lose their faith in the banking system, and have begun a ‘bank run’ that could snowball into a full-blown crisis.
The “collateral crunch” has come about because the banks’ traditional means of raising funds are running dry as investors, worried about the survival of the euro, are pulling out their savings or are easing up bank bond purchase.
Essentially, what this signals is that investors are beginning to lose their faith in the banking system, and have begun a ‘bank run’ that could snowball into a full-blown crisis.