Saturday, 15 September 2007

You are the Rock upon which I build my bank

Sorry Jesus for ripping your line off in my title.

I'm really amazed at how stupid people can be when it comes to banks. Witness the drama being made out of the Northern Rock situation. People have so far withdrawn £1bn from the bank since its announcement that it was using Bank of England emergency funding. If ever there is a self-fulfilling prophesy, this is it.

It's quite simple. The banking system is fundamentally solvent but illiquid because they make more interest lending your money than they pay you for depositing it with them by lending it out for longer. If you go and demand your money, they have to give it to you - but they have given it to someone else as a loan for a long time. So they keep some deposits lying around in cash to ensure that enough people can get their deposits in normal circumstances. Its liquidity relies on lots and lots of confidence in the system, and lots of interbank lending on the money markets to back it up.

By panicking and pulling their money out, people are going to send a liquid bank solvent. It's the same 'me first' attitude that saw us run out of petrol last year because a few people started panic buying and the rest followed like drearily stupid sheep.

I wonder if this will hit Ginko Bank again...

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