Bank Run

Here is the next installment of the public evidence of a bank run in France. This is literally a carbon copy of Bear Stearns/Lehman Brothers, just on a larger scale. Listen to that sucking sound. It's the illustion of liquidity hitting the hard wall of reality! You heard it hear first.

Run! French bank, Run!!!!

Who could have possibly imagined that in the month of June, Greek banks would see yet another major deposit outflow. Alas, according to just released NBG data, June deposit outflows by households and corporates amounted to €3.8 billion, bringing the total down to just €188 billion. This is a whopping 20% decline in total Greek bank deposits since January 2010. It also means that each increasing outflow merely plants the seeds for even more outflows in the next month as less and less confidence (and cash) remains in Greek banks. As a reference, an equivalent outflow in the US, based on the total $8 trillion in total domestic deposits, would imply a $160 billion monthly outflow, enough to put two Bank of Americas out of business. We expect to see comparable data out of the Bank of Italy, and then all other pigs, as billions of euros are being pulled from deposit accounts in insolvent countries and deposits in Switzerland. Naturally, it also means that European efforts to quell the panic are failing abysmally.

Less than an hour ago, Larry Kudlow tweeted the following: "Sources tell me Italy has to restructure bonds.Deposit run on Italian banks.EU will have to mount Tarp rescue.Big stress on interbank loans." Basically, this is the worst possible combination for Europe which means that another bailout is not only imminent but has to happen tomorrow. Incidentally Reuters is reporting of an emergency meeting between Sarkozy and Merkel and Zapatero on "the markets" which can only mean damage control following today's disastrous Trichet performance. Too bad the markets won't buy it any longer absent some actual actions to back up the deeds. Yet what we are more concerned about is whether or not there really is a bank run in Italy which would be the end of the euro. For that we went to the most trustworthy indicator for European "bankrunness" the EURCHF. To our surprise, the pair just plunged nearly 100 pips after hours, after dropping over 200 pips from intraday highs following yesterday's SNB intervention. Will this force the SNB to intervene again? Find out shortly. AS to what Sarkozy has up his sleeve, we will just have to wait and see when the European markets open in about 10 hours.

NPAs and devalued sovereign debt infect bank balance sheets, which are bailed out by sovereigns who assume too much debt for the bailouts, thus dropping the value of their bonds, further stressing bank balance sheets, thereby increasing the need for bailouts. Wash-Rinse-Repeat. Hey, he who panics first, panics best!

As we get closer to that point where economic reality and financial fact override/overpower politics & concerted central financial planning that attempts to outlaw insitutional failure, we need to employ fact based strategies backed by research based in realism to not only capitalize, but even last through the coming storm.

A European Bank Run: Step-by-Step. I outline the problems of a single bank that, unfortunately, is shared by many. This time next year, never let anybody tell you that this couldn't be seen coming as I illustrate how it will happen, and in detail!

It is simply a damn shame that it has come to this. What the political powers that be in Europe have done in their grasp to disseminate obvious mis/disinformation is to sow the seeds for history's first Pan-European bank run! It is more than obvious to the entire world that 18% of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage. What is the purpose of attempting to conceal facts hidden in plain site?

Technically the title of this post is wrong: the truth is that nobody could possibly know or predict what a bank run would looks like in details suffice to say that it would have terminal and devastating results on the global economy. One needs only remember what happened when the Reserve Fund broke the buck and the $3 billion money market industry was at risk of unwinding (for those who do not, Paul Kanjorski does a good summary here). What we do, however, wish to demonstrate is the tenuous balance between physical money - yes, just like precious metals, there is actual "physical money", better known as currency in circulation - and more abstract, confidence-based, "electronic money." Now when it comes to talking about systemic instability, pundits often enjoy bringing up the case of the $600+ trillion (recently discussed here in a different capacity) in synthetic derivatives, whose implosion would "wipe out the world." While that may indeed be the case (the memory of the CDS-precipitated AIG implosion is still all too fresh), since nobody really can comprehend the side effects of the collapse of global derivative system, which by some estimates is over $1 quadrillion when combining exchange and OTC based derivatives, it is largely based on pure conjecture. And, as we demonstrate below, one doesn't even need to do get that high up in the pyramid of credit money. The truth is that should there be an American bank run, what would happen is the conversion of all electronic dollars into physical dollars, as retail Americans rush to empty their checking and savings accounts, exit their money markets, while institutional America converts all "shadow" liabilities into hard dollar assets (Zero Hedge has a specific methodology of defining what liabilities make up the shadow banking system). The truth is that should there be a D-Day in the American banking system and there is a global scramble for physical paper (ignore gold) the conversion ratio for binary dollars into hard ones could be as high as 30 to 1. Which begs the question: should one apply a 90% discount when evaluating their electronic dollar exposure? That, and many other questions too...

The quietest bank run that has so far completely evaded mainstream attention, that of Korea, is spreading, and an eighth bank has now shuttered after "Domin Bank, a savings bank with a capital adequacy ratio below 5
percent, voluntarily decided yesterday to suspend its operations
temporarily because of massive withdrawals." As JoongAng reports: "The decision took both depositors and financial regulators by surprise
since it was the first time that a local bank shut its doors on its own." Apparently the courageous decision by the Financial Services Chairman Kim Seok-dong to deposit $17,864 in a troubled bank has not done much if anything to prevent the locals from realizing that their banking system is built on a house of cards.

Last Friday we reported that the soon to be quite pervasive spectacle of running to the bank only to find there is no money available, had spread to Korea. At that time only two banks were involved, although we speculated that "while the bank run at Busan was driven by capital inadequacy it may promptly spread to the entire banking system." Less than 3 days later, it has done just that. China Post reports that: "South Korea suspended operations at
four more savings banks on Saturday after runs developed as customers
rushed to get at their money despite official assurances the financial
sector was secure." Gee whiz, looks like last week's promises that everything was contained were, gasp, lies? " The Financial Services Commission (FSC) said Saturday it was suspending three affiliates of Busan Savings Bank — Jungang Busan Savings Bank, Busan II Savings Bank and Jeonju Savings Bank — as well as Bohae Bank for six months each. “Considering recent waves of deposit withdrawals, available liquidity, remaining deposits and capacity to borrow, the FSC concluded that they might face a situation where they are unable to pay customers,” the FSC said." And in an almost verbatim transposition of our own Telepromptermarionette-in-Chief's admonition in March 2009 that "profit and earnings" ratios were now cheap or some other such garbage, the head of the Financial Services Commission Kim Seok-dong (not related to Bang Dae-Ho) "vowed to make a personal deposit of 20 million won ($17,864) in Woolee
to convince depositors that the bank was financially sound." And if that doesn't work Korea can always rent Brian Sack out for a few days each week: truth be told, the US can easily cut down on the amount of weekly POMOs now that WTI is about to pass $100 (and Brent $110).

When one thinks of South Korea one tends to think of stable government and an even more stable financial system. That may change very soon. According to JoongAng Daily, "more than a thousand customers lined up in front of the Busan II
Savings Bank located in Busan yesterday as soon as the nation’s
financial regulator announced a six-month business suspension of Busan
Savings Bank and its affiliate Daejeon Mutual Savings Bank." And not helping the mood was a bank employee who told the crowd that "You won’t be allowed to withdraw your money if you are just standing
there without a queue ticket number." Needless to say, most promptly got a number. Those that didn't tried to get their cash at an ATM. Unsuccessfully: "Those without a ticket then headed to the automated teller machines to
withdraw their money, but the machines quickly ran out of cash." And while the bank run at Busan was driven by capital inadequacy (shockingly Korea still hasn't figure out that the best way to mask liabilities surpassing assets is through pervasive fraud and suspension of all common sense accounting rules: they should promptly consult with Tim Geithner and Sheila Bair on the issue), it may promptly spread to the entire banking system. "Analysts expressed concerns that public panic about savings banks could spread.  “The
fears of depositors are mounting, which could lead to bank runs at a
number of savings banks, and it could eventually spread to the entire
savings bank industry,” said Jung Sung-tae, a researcher at LG Economic
Institute." But fear not, for the Korean government is one step ahead: "A way to secure capital [for savings banks] is to establish a joint
account holding fund amounting to 10 trillion won,” explained Kim
Seok-dong, FSC chairman. “This problem will be closely discussed with
the National Assembly.” Any day now Korea will end up with its own version of a taxpayer funded capital block hole, a/k/a in the US as the FDIC, and all problems will be promptly brushed under the rug. We can't wait until this brilliant idea comes to China (advised by Goldman Sachs no doubt). We just wonder if it will be before or after the Chinese bank run hits...

Last August, Anthony Ward's Amajaro fund tried, and failed, to corner the cocoa market. He may have been half a year early, as the country may soon let cocoa speculators (at least those on the long side) finally enjoy their day in the sun. After an ongoing political crisis has left the country with two presidents, neither of which is willing to abdicate power peacefully, and technically bankrupt the latest development is the logical: a countrywide bank run. The Globe and Mail reports that the world's largest exporter of cocoa, which has now effectively been isolated by the global banking system, following its technical default on $2.3 billion in bonds, is seeing bank after bank shut down as residents are scrambling to withdraw whatever money is available in the financial system. "A third bank shut its doors Wednesday amid a political crisis in
Ivory Coast, as residents in the commercial hub lined up at banks to try
to withdraw their savings amid rumours of a cash shortage. British
bank Standard Chartered confirmed in an e-mail Wednesday that it had
suspended its operations in Ivory Coast, joining two other banks, BICICI
and Citibank, and the regional stock exchange. Hundreds of people marched from one bank to the next in downtown Abidjan
Wednesday afternoon, trying to find a working bank machine." Well, not really a bank run. More like a bank march. However, unlike Egypt, we don't anticipate the government (one of the two), to start flying in hundreds of millions in currency to placate the mob.

Today, for the first time in two weeks, the Egyptian banking system will be open, and the result: huge lines and a very possible bank run at the 200 or so banks which the Egyptian central bank announced would be open between 10:00 am and 1:30 pm today. And just to make things a little bit easier (yet harder) on itself, courtesy of a withdrawal limit of 50,000 Egyptian pounds and $10,000 a day, depositors will take out the max which should promptly deplete bank stores, and also set the population on edge, which withdrawal limits tend to do virtually everywhere. Also, the Egyptian central bank, which has one upped Blackhawk Ben, and been restocking through a military cargo plane, will soon need a far bigger one: "The central bank moved 5 billion pounds ($854 million) of cash into the financial system as depositors gained access to their savings. The regulator, which has $36 billion in reserves and guarantees deposits, used military cargo planes to bring in the funds, Governor Farouk El-Okdah said yesterday on state-run television." And another lesson Egypt has learned from both the US and the EU: mask any smell of insolvency with that truty old pyramid scheme known as bond issuance: "The government plans to sell 15 billion pounds in treasury bills tomorrow after canceling last week’s auction as protests against Mubarak intensified. Yields on Egypt’s bills may surge about 30 percent, said Shahinaz Foda, the head of treasury at BNP Paribas Egypt."

According to Al Jazeera, the Egyptian Central Bank has just imposed a withdrawal limit of $10,000 on all banks in order to prevent a systemic bank run that will promptly wipe out what is left of the financial system. Look for this number to be cut to $100 in the first several minutes after banks reopen (whenever that actually happens). As for all that central bank currency "gold backing", somehow we have a feeling that Egypt's 75.6 tonnes in gold is about to be drastically adjusted. Also, it is not too late to reevaluate that long EGPT thesis.