Benn Steil


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Sovereign Credibility and Bank Runs

January 5, 2011

In the midst of the financial crisis of 2008, governments helped to prevent bank runs by guaranteeing bank debts. Yet as sovereign solvency itself becomes an issue, such guarantees quickly lose their value. If Ireland provides a rule of thumb, bank runs can be expected once sovereign credit default swap yields pass 3%. The figure above shows that when Irish government CDS yields first passed 3% in early 2009, foreign deposits fled the country. This happened again in late 2010. Now that Spanish CDS yields have broken the 3% threshold, there is reason to be concerned about the stability of Spanish bank deposits as well.

Steil, Swartz: When Irish IOUs are Smouldering
Geo-Graphics: Luck of the Irish Hinges on Banks
Economist: European Banks
Barr: 2011-Year of the Bank Run?

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  • Posted by CrisisMaven

    When central banks have the runs, no wonder people stage bank runs. Sound money would prevent this – bank runs only happen when
    a) a central bank is in place and
    b) it allows more money to be created than there is collateral.
    In any other branch of industry that would put you in jail (cf. Bernie Madoff), in banking it will promote you to economics advisor.

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