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The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run | Zero Hedge

The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run | Zero Hedge.

Yesterday we showed the end result of what happens in a China, in which bankruptcy and default are suddenly all too real outcomes for the country’s hundreds of millions of depositors, when the risk of losing all of one’s money held in an insolvent bank becomes a tangible possibility in “What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors.” Today, we look in detail at all the discrete elements that culminated with hundreds of Chinese residents lining up in front of a bank in Yancheng and rushing to withdraw their money only to find their money not available (at least until the regional government was forced to step in with a bail out to avoid an even greater panic).Why is this a useful exercise? Because since we will certainly see many more example of it in the near future, it pays to be prepared. Or least it certainly prevents one from losing all of their money…

This is what happened, and when it happened, it happened quick. From Reuters:

The rumour spread quickly. A small rural lender in eastern China had turned down a customer’s request to withdraw 200,000 yuan ($32,200). Bankers and local officials say it never happened, but true or not the rumour was all it took to spark a run on a bank as the story passed quickly from person to person, among depositors, bystanders and even bank employees.

Savers feared the bank in Yancheng, a city in Sheyang county, had run out of money and soon hundreds of customers had rushed to its doors demanding the withdrawal of their money despite assurances from regulators and the central bank that their money was safe.

 

The panic in a corner of the coastal Jiangsu province north of Shanghai, while isolated, struck a raw nerve and won national airplay, possibly reflecting public anxiety over China’s financial system after the country’s first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.

 

Rumours also find especially fertile ground here after the failure last January of some less-regulated rural credit co-operatives.

And since nothing beats a first person account here is just that, courtesy of Jin Wenjun who saw the drama unfold.

He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.

Bank officials tried to assure the depositors that there was enough money to go around, but the crowd kept growing.

In response, local officials and bank managers kept branches open 24 hours a day and trucked in cash by armoured vehicle to satisfy hundreds of customers, some of whom brought large baskets to carry their cash out of the bank.

Jin found himself at the bank branch just after midnight to withdraw 95,000 yuan for his friend from a village 20 kms (12 miles) away.

“He was uncomfortable. It was late and he couldn’t wait, so he left me his ID card to withdraw his cash,” Jin said.

By Tuesday, the crisis of confidence had engulfed another bank, the nearby Rural Commercial Bank of Huanghai.

“One person passed on the news to 10 people, 10 people passed it to 100, and that turned into something pretty terrifying,” said Miao Dongmei, a customer of the Sheyang bank who owns an infant supply store across the street from the first branch to be hit by the run.

Claiming to be a Yancheng resident, one user of Sina Weibo’s Twitter-like service repeated the story on Monday about the failed 200,000 yuan withdrawal, adding that “rumours are the bank is going bankrupt.”

When later contacted by Reuters online, he said he had heard the rumour from his mother when she came back from town. Huanghai and Jiangsu Sheyang banks declined to comment.

China’s banks are tightly controlled by the state and bank bankruptcies are virtually unheard of, so the crisis has baffled many outsiders.

Yet in Sheyang, fears of a bank collapse resonate.

In recent years, this corner of hard-strapped Jiangsu province has experienced a boom in the number of loan guarantee, or ‘danbao’, companies and rural capital co-operatives.

These often shadowy private financial institutions promised higher returns on deposits than banks, but many have since failed.

Qu Guohua, a spiky haired former migrant worker in his 50s, nearly lost 30,000 yuan in a credit guarantee scheme that went up in flames.

What saved him one day in January 2013 was a tip-off from a friend at a rural co-operative just down the street from the loan guarantee company where he had his money.

He told me the other one was going to go out of business and I better go get my money quick,” he said.

Qu managed to get his cash, but others behind him in line were not so lucky, he said.

That helps explain why lines formed so quickly once the rumours started circulating this week. Luck has it, he deposited the cash in a bank next door: Sheyang Rural Commercial Bank.

Banks are different than credit co-operatives and guarantee companies in that they are regulated by China’s banking watchdog and subject to strict capital requirements.

On Wednesday, officials’ painstaking efforts to drive that message home were in full swing.

Bank managers stacked piles of yuan behind teller windows in full sight of customers to try to reassure them that they had plenty of cash on hand. Local officials used leaflets, radio and television to try to calm nerves.

Near one of the troubled banks, a branch of the China Commercial Bank – one of China’s ‘Big Four’ state-owned banks – was running a ticker message on an electronic board over the entrance stating: “Sheyang Rural Commercial Bank is a legal financial organisation approved by the state, just like us”.

While small groups of depositors still gathered at several bank branches in and around this part of Yancheng, some arriving by motorbike, others by three-wheeled motor vehicles common in the Chinese countryside, there were signs that the banks’ efforts were bearing fruit.

Jin said he did not panic when the rumours were spreading and on Wednesday, like many others, he made a deposit.

Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank where he still has about 10,000 yuan – just for a look.

“I’m not nervous about my money in the bank. It’s protected by national law.

* * *

The same international law that “protected” the Cyprus banking system?

In the meantime, perhaps one should ask: why is it that people everywhere around the globe are so jittery, be it Chinese bank depositors, or E*trade baby high frequency “investors” in US stocks?Is it because everyone sense that fundamentally the system is more broke and insolvent than ever?

* * *

In short, the US has a stock market, which everyone knows is fake and manipulated, but as long as it keeps going higher, it is “safe” to put even more cash into epically overvalued equities. And since everyone is confident they can pull their money before everyone else does, the downswings are sharp and violent (and usually require the Plunge Protection Team to get involved and halt them), and in many ways a complete one-sided panic.

Just like in China. Only in China, instead of being stuck behind their computers, people actually have to go out on the street and withdraw their physical cash before everyone else does.

The problem, of course, is that once the lies and the illusions end, and they will, there will not be enough physical claims to satisfy everyone, be it due to a deposit or equity flight. Because in a fractional reserve system already stretched to the max and leveraged to record levels, one thing is certain: once the upward momentum dies, only devastation and guaranteed 90%+ losses for most, await.

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge.

Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.

Reuters explains:

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank’s chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.

“At the moment there are about 70 or 80 people in there. Normally there’d only be about 10,” she told Reuters by telephone.

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. “We will be holding an emergency meeting tonight,” an official at the bank’s administration office told Reuters, but declined to comment further.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.

Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:

“It’s true that these rumours exist, but actually (the bank going bankrupt) is impossible. It’s a completely different situation from the problem with the cooperatives,” said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.

And Bear Stearns is fine…

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives — which are not subject to the supervision of the bank regulator — ran out of cash and locked their doors. Local officials say several co-op bosses fled after committing fraud.

China’s central bank governor said this month that deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China’s debt nightmare a province called Jiangsu?

Why are bank runs like these only set to accelerate? Simple – unlike the US China has zero deposit insurance. Reuters expplains:

The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:

When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.

Others were even more helpful:

An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.

Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China – which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) – survive a nationwide bank run we wonder?

Russian Bank Impacted By US Sanctions Hit By Mini Bank Run Over The Weekend | Zero Hedge

Russian Bank Impacted By US Sanctions Hit By Mini Bank Run Over The Weekend | Zero Hedge.

Last week, after western sanctions against Russia expanded to include not only the first financial institution, Bank Rosiya, but also SMP bank whose main shareholders were on the sanctions list, unexpectedly both Visa and MasterCard halted providing transaction services to the two banks, without providing an explanation. Over the weekend, one of the banks got its full credit card functionality back after Visa Inc and MasterCard both resumed services for payment transactions for clients at Russia’s SMP bank.

As a reminder, SMP, which has about 100 branches covering more than 20 Russian cities, has co-owners Boris Rotenberg and older brother Arkady,  who received large contracts in the Sochi Winter Olympics, and who were both added to the expanded US sanctions list, and as we reported before, SMP had said on Friday that Visa and MasterCard had stopped providing services for payment transactions for clients at Russia’s SMP bank. The bank said the decision to stop providing services by Visa and MasterCard was unlawful because the sanctions were imposed on shareholders, not the bank, which said it has no assets in the United States.

“We are glad that the two biggest international payment systems have heard our arguments and reversed their decision to block (SMP bank transactions),” SMP bank CEO Dmitry Kalantyrsky, said in a statement.

What was the purpose of this escalation? Simple: as Reuters reports, SMP Bank said on Monday around 9 billion roubles ($248 million) had been withdrawn by depositors since U.S. sanctions were announced last week.

Washington imposed sanctions on Thursday against 20 Russians close to President Vladimir Putin over Moscow’s involvement in the Ukraine crisis, including Boris Rotenberg and his older brother Arkady, the co-owners of SMP Bank.

SMP CEO Dmitry Kalantyrsky told a news conference that an estimated 4 billion roubles had been withdrawn by individuals and 5 billion by organisations.

In other words, the staggered escalations against Russian banks, to which credit card processors have joined without any specific reason, were meant solely to incite a bank panic and to promote bank run conditions. With SMP this succeeded partially, with quarter of a billion withdrawn, however hardly enough to cripple the bank. At least for now.

As Bloomberg reports, as the new Cold War escalates between the West and Russia, the next most likely event is a Russian recession:

Banks including state-run VTB Capital say the world’s ninth-biggest economy will shrink for at least two quarters as penalties for annexing Crimea rattle markets, curb investment and raise the cost of borrowing. Sanctions that have so far focused on individuals via visa bans and asset freezes may be expanded to target specific areas of the economy.

President Vladimir Putin sent his popularity surging to a five-year high by making Crimea a part of Russia again after 60 years and says he won’t be swayed by foreign retaliation. Even so, the costs of the decision are starting to unfold, with Russian stocks this year’s worst performers and the economy set to suffer more than the West, said Mircea Geoana, Romania’s government representative for diplomacy and economic projects.

“We’re witnessing the start of a new geopolitical and economic Cold War and I think it will take at least two to three years to establish some sort of equilibrium,” he said. “The ones who’ll pay the bill for this aggression, no matter how popular and patriotic it looks, will be the Russian people because there’s a huge difference between the economic force of the EU and the U.S. and that of Russia.”

* * *

Russia will probably dip into a recession in the second and third quarters of this year as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions,” according to Moscow-based VTB.

Russia’s central bank unexpectedly raised its benchmark interest rate by 150 basis points after the armed takeover of Crimea triggered a rout in the ruble. Putin completed his annexation of the Black Sea peninsula March 21.

Russia may shun foreign debt markets in 2014 because of higher borrowing costs, according to Finance Minister Anton Siluanov. He expressed frustration at disruptions to MasterCard Inc. and Visa services for cards issued by banks on or linked to persons on the U.S. sanctions list.

“Some people say these sanctions won’t affect Russia’s financial system but they already are,” he said March 21.

Of course, as we reported last week, any dramatic deterioration in the Russian economy will simply push it closer to China, which for all intents and purposes is the provider of funding for Western “discretionary spending” anyway, so why not just cut the middleman, and the petrodollar, entirely?

Russian Bank Impacted By US Sanctions Hit By Mini Bank Run Over The Weekend | Zero Hedge

Russian Bank Impacted By US Sanctions Hit By Mini Bank Run Over The Weekend | Zero Hedge.

Last week, after western sanctions against Russia expanded to include not only the first financial institution, Bank Rosiya, but also SMP bank whose main shareholders were on the sanctions list, unexpectedly both Visa and MasterCard halted providing transaction services to the two banks, without providing an explanation. Over the weekend, one of the banks got its full credit card functionality back after Visa Inc and MasterCard both resumed services for payment transactions for clients at Russia’s SMP bank.

As a reminder, SMP, which has about 100 branches covering more than 20 Russian cities, has co-owners Boris Rotenberg and older brother Arkady,  who received large contracts in the Sochi Winter Olympics, and who were both added to the expanded US sanctions list, and as we reported before, SMP had said on Friday that Visa and MasterCard had stopped providing services for payment transactions for clients at Russia’s SMP bank. The bank said the decision to stop providing services by Visa and MasterCard was unlawful because the sanctions were imposed on shareholders, not the bank, which said it has no assets in the United States.

“We are glad that the two biggest international payment systems have heard our arguments and reversed their decision to block (SMP bank transactions),” SMP bank CEO Dmitry Kalantyrsky, said in a statement.

What was the purpose of this escalation? Simple: as Reuters reports, SMP Bank said on Monday around 9 billion roubles ($248 million) had been withdrawn by depositors since U.S. sanctions were announced last week.

Washington imposed sanctions on Thursday against 20 Russians close to President Vladimir Putin over Moscow’s involvement in the Ukraine crisis, including Boris Rotenberg and his older brother Arkady, the co-owners of SMP Bank.

SMP CEO Dmitry Kalantyrsky told a news conference that an estimated 4 billion roubles had been withdrawn by individuals and 5 billion by organisations.

In other words, the staggered escalations against Russian banks, to which credit card processors have joined without any specific reason, were meant solely to incite a bank panic and to promote bank run conditions. With SMP this succeeded partially, with quarter of a billion withdrawn, however hardly enough to cripple the bank. At least for now.

As Bloomberg reports, as the new Cold War escalates between the West and Russia, the next most likely event is a Russian recession:

Banks including state-run VTB Capital say the world’s ninth-biggest economy will shrink for at least two quarters as penalties for annexing Crimea rattle markets, curb investment and raise the cost of borrowing. Sanctions that have so far focused on individuals via visa bans and asset freezes may be expanded to target specific areas of the economy.

President Vladimir Putin sent his popularity surging to a five-year high by making Crimea a part of Russia again after 60 years and says he won’t be swayed by foreign retaliation. Even so, the costs of the decision are starting to unfold, with Russian stocks this year’s worst performers and the economy set to suffer more than the West, said Mircea Geoana, Romania’s government representative for diplomacy and economic projects.

“We’re witnessing the start of a new geopolitical and economic Cold War and I think it will take at least two to three years to establish some sort of equilibrium,” he said. “The ones who’ll pay the bill for this aggression, no matter how popular and patriotic it looks, will be the Russian people because there’s a huge difference between the economic force of the EU and the U.S. and that of Russia.”

* * *

Russia will probably dip into a recession in the second and third quarters of this year as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions,” according to Moscow-based VTB.

Russia’s central bank unexpectedly raised its benchmark interest rate by 150 basis points after the armed takeover of Crimea triggered a rout in the ruble. Putin completed his annexation of the Black Sea peninsula March 21.

Russia may shun foreign debt markets in 2014 because of higher borrowing costs, according to Finance Minister Anton Siluanov. He expressed frustration at disruptions to MasterCard Inc. and Visa services for cards issued by banks on or linked to persons on the U.S. sanctions list.

“Some people say these sanctions won’t affect Russia’s financial system but they already are,” he said March 21.

Of course, as we reported last week, any dramatic deterioration in the Russian economy will simply push it closer to China, which for all intents and purposes is the provider of funding for Western “discretionary spending” anyway, so why not just cut the middleman, and the petrodollar, entirely?

Bank Run Full Frontal: Ukrainians Withdrew 7% Of All Deposits In Two Days | Zero Hedge

Bank Run Full Frontal: Ukrainians Withdrew 7% Of All Deposits In Two Days | Zero Hedge.

Well that escalated quickly. It seems the ouster of Yanukovych, heralded by so many in the West as a positive, has done nothing to quell the fear of further economic collapse in Ukraine:

  • *UKRAINIANS WITHDREW AS MUCH AS 7% OF DEPOSITS FEB. 18-20: KUBIV
  • *DEPOSIT WITHDRAWALS STILL HIGH IN THE EAST, KUBIV SAYS

This is around a 30 billion Hyrvnia loss (over $3 billion) in just 2 days for the banks and the new central bank chief is considering “stabilizing loans” to help banks deal with the liquidity crisis(though Ukraine’s reserves stand at a mere $15 billion).

Reserves are in freefall… and will only get worse if the bank run continues…

Bank Runs Spread To Thailand | Zero Hedge

Bank Runs Spread To Thailand | Zero Hedge.

Thailand’s Government Savings Bank (GSB) president admitted that clients withdrew 30bn Baht (around $1bn) in a single-day last week and Bank for Agriculture and Agricultural Cooperatives (BAAC) and Krungthai Bank (KTB), although of a much smaller magnitude, have also seen withdrawal spikes of similar magnitude according toThe Bangkok Post. The ‘bank run’ comes after speculation that cash at the state-run banks are being used by the government (which is in turmoil) to fund farmers (who have not received their ‘promised’ rice subsidies of over 130 bn Baht). Withdrawal requests are met with banks warning that there were insufficient funds at the time due to many depositors withdrawing cash. One depositor, rather ironically summed it up, “I started to feel concerned that my money may become only paper.”

Via The Bangkok Post,

The deposit flight from the Government Savings Bank (GSB) is not out of fear for its financial stability but rather is a response to speculation the state-run bank is involved in lending to the troubled rice subsidy of the Yingluck Shinawatra government.

Spikes in money withdrawal have also been seen at the Bank for Agriculture and Agricultural Cooperatives (BAAC) and Krungthai Bank (KTB), although of a much smaller magnitude.

The bank run comes after the Thai government’s “rice-pledging” scheme – which

The rice pledging scheme, a key plank of the Pheu Thai Party’s winning platform in 2011, is proving to be the Achilles heel of Yingluck Shinawatra’s caretaker government.

Problems with the scheme, which offered farmers a price 40-50% higher than market prices, loomed shortly after it began in October 2011. The Yingluck government hoarded a large supply in state warehouses, wagering that global rice prices would rise.

The attempt to manipulate the market backfired as rice flooded the global market. The bad bet has left Thailand with a record stockpile, and the country has relinquished its crown as top rice exporter to India and Vietnam.

Thailand’s rice shipments in 2012 and 2013 totalled less than 7 million tonnes, down from 9-10 million tonnes in the past. The scheme is tarnishing the caretaker government, and things worsened when the National Anti-Corruption Commission last month announced a probe of Ms Yingluck’s role in the scheme after bringing formal corruption charges against two of her cabinet ministers.

With the huge stockpile and the government’s vow to buy every single grain, the rice subsidy is estimated to have caused losses north of 400 billion baht for the first two harvest seasons, quickly exhausting its 500-billion-baht outstanding budget.

In response, the government sought 180 billion baht from the BAAC to make advance payments to farmers.

And the current bank run was sparked when…

Due to the cash crunch, the Yingluck government delayed paying 130 billion baht to 1.4 million farmers — a core constituency of Pheu Thai. Ms Yingluck’s decision to dissolve the House last Dec 9 has obstructed the caretaker government’s ability to borrow more to pay farmers, as such borrowing could be ruled unconstitutional and leave banks open to charges of wrongdoing.

GSB president Worawit Chailimpamontri insisted during urgent press conferences yesterday and Sunday that the GSB has extended 5 billion baht to the BAAC as part of its existing 20-billion-baht credit line to the BAAC in the interbank market, and that the funds were not meant to fund the rice pledging scheme.

Even so, the lending has spurred rumours that it would be used to pay the government’s overdue debt to rice farmers.

Interbank borrowing is a channel that allows banks experiencing a glut of savings to lend to banks that are falling short of liquidity.

But both the GSB and the BAAC have surplus liquidity, said Dr Lalida, adding that such borrowing is considered a hidden deal.

The people are not happy that their deposits are being used this way…

Such actions are deemed to help the government avoid legal restrictions,” said Lalida Veeravithayanant, a doctor at a local hospital, referring to the alleged loans.

She withdrew 800,000 baht from her two accounts at KTB a day after she learned the country’s biggest state-owned bank had approved short-term loans to existing customers who are rice traders and exporters taking part in government rice auctions.

Dr Lalida said it was a surprise when she requested a cash withdrawal at KTB’s branch in the Zuellig House building on Silom Road and was denied. The excuse given was that there were insufficient funds at the time due to many depositors withdrawing cash.

She also closed her savings account with the GSB after withdrawing 100,000 baht and redeeming savings certificates to the tune of 1 million baht after local media reported the bank had extended billions of baht in loans to the BAAC through interbank lending.

The right way to solve the rice pledging problem is by selling rice to pay off farmers. The current method will create a distortion of the problem,” she said.

Simply put – the people no longer trust the banks…

“Being a state-owned bank, it must have responsibility,” she said. “The bank cannot say it does not know what the BAAC will use the lending for. If so, how can the bank extend loans without any risk evaluation, and how can people trust the bank?”

Even though the irregular withdrawals from the GSB stemmed from depositors’ discontent over lending to the BAAC, fears from other depositors that they may not get their money back in full and immediately as requested could escalate — and the bank could be in hot water at that point.

“I withdrew 20,000 baht from my savings account at the GSB and redeemed another 180,000 baht in savings certificates, as I started to feel concerned that my money may become only paper like the farmers’ pledging invoices,” said another employee of an international company.

So – in summary – the government won an election by promising to pay rice farmers (a major part of Thailand’s voting population) more money… soon after, the ‘promise’ was shown to be entirely false and now the government is using its banks (and thus other people’s deposits) to make good on its ‘promises’ and to keep the rest of the people happy… sound familiar?

A Walk-Thru The First Shadow Bank Run… 250 Year Ago | Zero Hedge

A Walk-Thru The First Shadow Bank Run… 250 Year Ago | Zero Hedge.

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn’t.

As the NY Fed’s blog (whose historical narratives are far more informative and accurate than its attempts to “explain away” the labor force participation collapse) recounts, the first tremor in the shadow banking system took place not in 2008 but some 250 years ago… during the Commercial Credit crisis of 1763, whose analog today is the all too shaky and largely unregulated core shadow banking system component: Tri-Party Repo.

From the NY Fed blog, by James Narron and David Skeie:

Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market

During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.

Early Credit Wrappers

One of the primary financial credit instruments of the 1760s was the bill of exchange—essentially a written order to pay a fixed sum of money at a future date. Early forms of bills of exchange date back to eighth-century China; the instrument was later adopted by Arab merchants to facilitate trade, and then spread throughout Europe. Bills of exchange were originally designed as short-term contracts but gradually became heavily used for long-term borrowing. They were typically rolled over and became de facto short-term loans to finance longer-term projects, creating a classic balance sheet maturity mismatch. At that time, bills of exchange could be re-sold, with each seller serving as a signatory to the bill and, by implication, insuring the buyer of the bill against default. This practice prevented the circulation of low-credit-quality bills among market participants and created a kind of “credit wrapper”—a guarantee for the specific loan—by making all signatories jointly liable for a particular bill. In addition, low acceptance fees—the fees paid to market participants for taking on the obligation to pay the bill of exchange—implied a perceived negligible risk. But the practice also resulted in binding market participants together through their balance sheets: one bank might have a receivable asset and a payable liability for the same bill of exchange, even when no goods were traded. By the end of the Seven Years’ War in 1763, high leverage and balance sheet interconnectedness left merchant bankers highly vulnerable to any slowdown in credit availability.

Tight Credit Markets Lead to Distressed Sales

Merchant bankers believed that their balance sheet growth and leverage were hedged through offsetting claims and liabilities. And while some of the more conservative Dutch bankers were cautious in growing their wartime business, others expanded quickly. One of the faster growing merchant banks belonged to the de Neufville brothers, who speculated in depreciating currencies and endorsed a large number of bills of exchange. Noting their success (if only in the short term), other merchant bankers followed suit. The crisis was triggered when the brothers entered into a speculative deal to buy grain from the Russian army as it left Poland. But with the war’s end, previously elevated grain prices collapsed by more than 75 percent, and the price decline began to depress other prices. As asset prices fell, it became increasingly difficult to get new loans to roll over existing debt. Tight credit markets led to distressed sales and further price declines. As credit markets dried up, merchant bankers began to suffer direct losses when their counterparties went bankrupt.

The crisis came to a head in Amsterdam in late July 1763 when the banking houses of Aron Joseph & Co and de Neufville failed, despite a collective action to save them. Their failure caused the de Neufville house’s creditors around Amsterdam to default. Two weeks later, Hamburg saw a wave of bank collapses, which in turn led to a new wave of failures in Amsterdam and pressure in Berlin. In all, there were more than 100 bank failures, mostly in Hamburg.

An Early Crisis-Driven Bailout

The commercial crisis in Berlin was severe, with the manufacturer, merchant, and banker Johann Ernst Gotzkowsky at the center. Gotzkowsky’s liabilities were almost all in bills of exchange, while almost all his assets were in fixed capital divided among his silk works and porcelain factory. Berlin was able to mitigate the effects of the crisis when Crown Prince Frederick imposed a payments standstill for several firms. To prevent contagion, the prince also organized some of the first financial-crisis-driven bailouts after he examined the books of Gotzkowsky’s diverse operations. Ultimately, about half of Gotzkowsky’s creditors accepted 50 cents on the dollar for outstanding debts.

Meanwhile, banks in Hamburg and the Exchange Bank of Amsterdam tried to extend securitized loans to deflect the crisis. But existing lending provisions restricted the ratio of bank money to gold and silver such that the banks had no real power to expand credit. These healthy banks were legally limited in their ability to support the credit-constrained banks. To preserve cash on hand, Hamburg and Amsterdam banks were slow to honor bills of exchange, eventually honoring them only after pressure from Berlin. The fact that Amsterdam and Hamburg banks re-opened within the year—and some even within weeks—provides evidence that the crisis was one of liquidity and not fundamental insolvency.

The crisis led to a period of falling industrial production and credit stagnation in northern Europe, with the recession being both deep and long-lasting in Prussia. These developments prompted a second wave of bankruptcies in 1766.

Distressed Fire Sales and the Tri-Party Repo Market

From this crisis we learn that it is difficult for firms to hedge losses when market risk and credit risk are highly correlated and aggregate risk remains. In this case, as asset prices fell during a time of distressed “fire sales,” asset prices became more correlated, further exacerbating downward price movement. When one firm moved to shore up its balance sheet by selling distressed assets, that put downward pressure on other, interconnected balance sheets. The liquidity risk was heightened further because most firms were highly leveraged. Those that had liquidity guarded it, creating a self-fulfilling flight to liquidity.

As we saw during the recent financial crisis, the tri-party repo market was overly reliant on massive extensions of intraday credit, driven by the timing between the daily unwind and renewal of repo transactions. Estimates suggest that by 2007, the repo market had grown to $10 trillion—the same order of magnitude as the total assets in the U.S. commercial banking sector—and intraday credit to any particular broker/dealer might approach $100 billion. And as in the commercial crisis of 1763, risk was underpriced with low repo “haircuts”—a haircut being a demand by a depositor for collateral valued higher than the value of the deposit.

Much of the work to address intraday credit risk in the repo market will be complete by year-end 2014, when intraday credit will have been reduced from 100 percent to about 10 percent. But as New York Fed President William C. Dudley noted in his recent introductory remarks at the conference “Fire Sales” as a Driver of Systemic Risk, “current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales.” For example, in a time of market stress, when margin calls and mark-to-market losses constrain liquidity, firms are forced to deleverage. As recently pointed out by our New York Fed colleagues, deleveraging could impact other market participants and market sectors in current times, just as it did in 1763.

Crown Prince Frederick provided a short-term solution in 1763, but as we’ll see in upcoming posts, credit crises persisted. As we look toward a tri-party repo market structure that is more resilient to “destabilizing asset fire sales” and that prices risk more accurately, we ask, can industry provide the leadership needed to ensure that credit crises don’t persist? Or will regulators need to step in and play a firmer role to discipline dealers that borrow short-term from money market fund lenders and draw on the intraday credit provided by clearing banks? Tell us what you think.

* * *

Fast forward to today when we find that the total collateral value in the Tri-Party repo system as of December amounts to $1.6 trillion.

… or 10% of US GDP. What can possibly go wrong.

BNP Warns “The Run On Ukrainian Deposits May Have Already Started” | Zero Hedge

BNP Warns “The Run On Ukrainian Deposits May Have Already Started” | Zero Hedge.

“It is absolutely impossible to forecast” Ukraine’s exchange rate, BNP Paribas notes in an ominous report today. Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows – and these will be difficult to secure. The Hyrvnia has collapsed this morninng to 9.00 back near December 2008 lows as BNP warns “The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started.” Relying on external support amid a forced devaluation “increases risks of disorderly adjustement,” and that appears to happening.

Ukraine’s currency – the Hyrvnia has collapsed to 9.00 this morning…

BNP’s warnings today (via Bloomberg):

It is absolutely impossible to forecast” hryvnia’s exchange rate, BNP Paribas analysts Serhiy Yahnych and Yevgeniy Orudzhev in Kiev write in report today.

Ukraine’s current-account gap, unstable funding and anti-govt protests have “created a dangerous Molotov cocktail, which now seems to turn into a currency crisis:” BNP

“The National Bank of Ukraine conducted only a minor intervention yesterday, which led to increased demand for dollars this morning:” BNP

The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started. Furthermore, it is forced to conduct devaluation having no external support package, which increases risks of disorderly adjustement:” BNP

BNP comments seem extremely accurate from last year…

… rebalancing of the current account has been virtually zero over the last few months.

Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows. These will be difficult to secure

We expect FX reserves to nosedive to USD 18bn by the end of 2013, underlining the case for a weaker local currency. Ukraine badly needs to rebalance its current account, with calls for a more flexible (and weaker) FX rate getting louder.

Shutting Off the Money Tap – International Man

Shutting Off the Money Tap – International Man.

By Jeff Thomas

Recently, an HSBC depositor in Swindon, UK attempted to withdraw £10,000 from his account (which was in credit of about £50,000) and was told that he could withdraw no more than £1,000 without providing adequate proof as to how the funds would be used.

The depositor later stated:

“HSBC will not let me take out anything over £1,000 cash over the counter. I gave them warning, but they say they must know what I will use it for—they want to see evidence of hotel bookings, etc. In short, they refuse to give me my cash. HSBC say it is new internal rules to help prevent money laundering.”

An HSBC spokesman stated:

“In these instances we may also ask the customer to show us evidence of what the cash is required for. The reason for this is twofold, as a responsible bank we have an obligation to our customers to protect them, and to minimise the opportunity for financial crime.”

Further Developments

After less than a week of this policy having been implemented, it generated significant outcries from depositors—so much so that HSBC has already backed down. They had this to say:

“However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We are writing to apologise to any customer who has been given incorrect information and inconvenienced.”

So… apparently, it was a mere misunderstanding. Some mid-level manager apparently became overzealous in exercising what he considered to be “reasonable caution.”

So, what are we to make of this? Well, the message is clearly that we are to say to ourselves, “Cooler heads have prevailed. Tempest in a teacup. Problem solved.”

But this is not so. Similar instances of refusal to return funds over £1,000 have taken place in HSBC branches in Wilshire and Worcestershire in the past week. This tells us that this was an HSBC policy decision—that it came from senior HSBC management.

This attempt at greater control over depositors’ funds has a broader significance. Over the years, we have predicted that as the Great Unravelling progresses, we shall observe the seizing of wealth and monetary control by governments and banks, acting in concert.

Over time, both wealth in general and the control over it will move inexorably into the hands of the banks and the political leaders. As this unfolds, we shall see numerous trial balloons, such as this one by HSBC and others. (The Cyprus bail-in was a similar but more successful trial balloon.)

Some will succeed, others will fail, but the central programme will move inexorably on. That programme will be driven by a new assumption—that the holding of wealth and the management of wealth are so central to national and international stability that only the central banks and governments can be entrusted with them. The individual cannot be trusted to control his own wealth.

The Bank Takes on the Role of a Regulatory Body

In floating this new policy, the banks have changed their traditional role as a monetary storage facility. They have now been granted the authority to refuse the return of funds that have been entrusted to them, based upon their authority to be satisfied that the money will be well spent by the depositor. If the depositor is, in effect, being expected to prove to the bank that he does not plan to perform a criminal act, the bank goes beyond its function as a business and becomes a regulatory body.

Without delving into conspiracy theories, there can be little doubt that the UK government has provided extraordinary latitude to HSBC (and presumably other banks)—latitude that, not long ago, would have been considered reprehensible.

However, throughout Europe, the US, and much of the rest of the world, we are seeing a growing tendency for governments to allow banks to control depositors’ funds.

As stated above, the 2013 Cyprus bail-in is a similar case—one in which the banks literally stole depositors’ funds with the tacit approval of the Cypriot government, and to much encouragement from the EU.

Since that time, Canada has passed legislation allowing its banks to do the same; and, more recently, the IMF has announced a similar plan for the EU.

As regular readers of this publication will know, we frequently publish reminders that, historically, when a nation is in the final stages of decline, the government invariably performs a last squeeze of the lemon—a final confiscation of the public’s wealth.

They tend to do this through whatever means they feel may succeed. As that is the case, in the future, we can expect to see increasing:

  • Confiscation: As we have already seen and will soon see on a larger scale, banks will be given the right to steal depositors’ funds, as stated above.
  • Capital Controls: This will take many forms, but of particular interest will be an increase in governmental control over the expatriation of individuals’ money.
  • Civil Forfeiture: Law enforcement authorities of all branches now have the authority to seize the assets of any individual who is under suspicion of a crime. (This is particularly the case in the US. It is not necessary that the individual be convicted or even charged.) This will be on the increase and has begun to reach the point of “shakedowns”—stopping people expressly to seize assets.
  • Freezing of Assets: In the EU and US, accounts are presently frozen for a variety of reasons—the client may be “suspected of a crime,” or his transactions may be deemed to be “inappropriate.” In the future, reasons for freezing assets will expand to “the threat of a possible run on the bank,” and “concern for the stability of the economy.” Governments will additionally simply use the nondescript blanket term, “temporary emergency measure.” (As Milton Friedman noted, “Nothing is so permanent as a temporary government program.”)

As these events unfold, the average depositor will be pressed to continue to function economically, but, as troubled as he might be, he will go along, as he really doesn’t have a choice. (Should he object too strenuously, he may well be investigated.)

Each of the above justifications for shutting off the money tap sound reasonable… It’s just that they happen to be a lie.

As stated above, when a nation is in the final stages of decline, the government invariably performs a last squeeze of the lemon—a final confiscation of the public’s wealth.

That process has now begun and will inexorably expand and continue until the confiscations have reached the point of greatly diminished returns or collapse of the governments’ power, whichever comes first.

If the reader sees this as even a 50/50 possibility, he would be wise to take steps to safeguard his wealth by removing it from a system that has become a threat to his continued ownership of his wealth.

Editor’s Note: The best way you can safeguard yourself and your savings from the measures of a desperate government is through internationalization. There are some very practical strategies you can implement from your own living room. Going Global from Casey Research is a comprehensive A-to-Z guide on this crucially important topic. Click here to learn more.

Russia Ruble Collapse Escalates To Record Low | Zero Hedge

Russia Ruble Collapse Escalates To Record Low | Zero Hedge.

With all eyes on Russia over the next month as the Sochi Winter Olympics ramps up, we are sure having the market’s attention on a collapsing currency is not what Putin had in mind before he dropped $50 billion to make it snow. While the Ruble remains just above record lows against the USD, Bloomberg reports that it has dropped to a record low against the central bank’s dollar-euro basket. Russia’s finance minister proclaimed today (Erdogan style?) that Bank Rossii should not raise rates (which has been unchanged at 5.5% for the last 15 months). Russian CDS is widening (193bps at 4 month highs) but not cratering like other EM currencies but MICEX (stocks) have had their longest losing streak since April.

 

 

As Bloomberg adds,

The ruble depreciated 1.2 percent to 40.9632 versus the central bank’s dollar-euro basket by 6:01 p.m. in Moscow. A weaker ruble encourages Russians to withdraw and convert local- currency deposits, Sberbank’s main source of funding, while hurting retailers by making imports more expensive in ruble-denominated prices.

 

Investors are scared of the ruble devaluation,” Sergey Vakhrameev, an analyst in Moscow at AnkorInvest LLC, which manages about $30 million in assets, said by phone. “During strong devaluations, stock markets fall, investors become scared of indexes in countries where the devaluation isn’t controlled.”

Of course, this will only make the bank run problems worse…

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