Signs of Emerging Bank Runs?

One can sense trouble when banks impose limits on depositors withdrawal (or even ask depositors reasons why the have to withdraw large amounts of their own money) as with the recent case of HSBC.

More from Simon Black of the Sovereign Man.

It’s happening again. This time HSBC branches in the UK are putting limits on customer withdrawals.

Bank employees there have been telling customers that they first must demonstrate to the bank’s satisfaction WHY they want to withdraw their own money. The bank has simply decided in its sole discretion that it won’t give people their own money back.

This is positively revolting– a breach of a most sacred form of trust between a bank and its customers. It would have been unthinkable just 10-years ago. But today it’s par for the course.

Banks across most of the ‘developed’ world have razor thin liquidity and capitalization ratios—meaning that their margins of safety are extremely low.

If just a small percentage of their assets lose value, they’ll go under. Or, if just a small percentage of their customers want their deposits back, they won’t be able to pay up.

This is ultimately what’s happening to HSBC. It turns out their UK operations are in severe financial trouble, posting a major capital shortfall of over $100 billion.

This should come as no surprise. Less than a year ago, in response to how poorly capitalized British banks were, the banking regulators announced that it would allow banks to use creative accounting to boost their numbers.

In one method that was explicitly condoned by regulators, banks were authorized to count FUTURE earnings (i.e. profit that they may or may not earn in years to come) towards their capital TODAY.

It’s like calculating your net worth based on how much you -think- you might be earning 20-years from now.

This is fraud, plain and simple. And I wrote about this numerous times last year.

Of course HSBC is not alone. With few exceptions, most banks across Europe are in a similarly precarious position– highly illiquid and thinly capitalized.

This isn’t rocket science– it’s what broke banks do. We saw what happened in Cyprus last year when banks got “bailed-in” by their customers.

Read the rest here

In a world of central banking fractional banking system, only a fraction of reserves are held by banks to service depositor’s demand for cash. 

If or when there will be a surge of (simultaneous) withdrawals, banks with insufficient funds either resort to imposing limits or turn to their respective central banks for assistance. If the public senses the latter then this would only aggravate public’s demand to access their deposits. This happened to UK's Northern Rock in 2008 which led to the firm's bankruptcy and eventually was nationalized. 

HSBC’s actions, thus, reveal of possible signs of renewed banking distress via a “quasi” bank run.

Yet the common notion that depositors own or has full access to their money deposited with banks are mistaken. As economics Professor David Howden explains at the Mises Blog

Option clauses, for example, were widely used in the Scottish “free banking” era as a way to get depositors to stop asking for their money. A bank could elect not to hand over a deposit when asked, but would at least remunerate the customer for this inconvenience. At the time this was widely seen as problematic, as it drove a wedge between the motivations of depositors (have their cash safe and available) and bankers (use depositor funds and remain solvent).

Today’s banks don’t even do this – they just change the rules of the game half-way through. Depositors think they have full access to their money when they make a deposit. Not only that, they think they are the owners of their money. Wrong on both counts. According to the law of most lands, when you deposit your money in a bank it becomes property of the bank

(bold mine)

More signs of periphery to core dynamics?