Bank Run?

Bank runs are not exactly everyday occurrences. The last time a bank run happened in the U.S. was probably during the Great Depression. However, in England, Northern Bank recently experienced an unsettling bank run. Hundreds of frantic depositors lined up at the bank’s branches to withdraw their money. Propelled by fears that the subprime-mortgage crisis would obliterate their savings, the depositors ended up withdrawing about $6 billion from the bank. This amounted to one-eighth of the bank’s total deposits. The run showed no signs of waning until the British government stepped in to allay the depositors’ fears about the security of their money. So how likely is this to happen in the U.S.? In this post, we’ll address that question and the issues surrounding it.

Not Just Our Problem

The mortgage crisis is not limited to the United States. The United Kingdom and Spain, two countries with red-hot real estate markets, have experienced a similar phenomenon. Mortgages are commonly issued for 100%-125% of a home’s value, which is a perilous situation if home prices fall, and this is exactly what has happened in the U.S.and the U.K. Mortgage loans are issued to homebuyers who never had the requisite financial security to make good on such a massive commitment.

Over-Lending

An organization that originates a mortgage can sell it off usually in just a few weeks, regain the capital, and then, after freeing up the capital, originate a new mortgage. This method is largely responsible for its own demise because it compels banks to lend faster and faster. The more money that is issued in mortgages, the more mortgages the lender can sell or securitize. The more money the lender can free up for new mortgages, the more mortgage loans they can write, and the cycle continues on and on. Growth in deposits can’t keep pace with the growth in the lender’s mortgage portfolio, so the bank’s leverage grows and grows.

Red Flags That Your Bank Is Unsafe

If you are concerned that your money is not safe with your bank, you should look for these red flags before you do a bank run. Here are a few of the warning signs that your bank may be in trouble:

• The bank has a large mortgage portfolio and a small deposit base. Deposits have to keep up with mortgage books if the bank is to stay afloat.
• The bank gets the majority of its money from capital markets. The bank should raise less than 50% of its money from these sources.
• The bank isn’t too big to fail. Usually, larger banks aren’t as vulnerable to failure as smaller banks. If you do business with a small bank, use the size to your advantage by taking the time to talk to a bank officer or representative about your concerns.