Fears Spread About Online Bank Runs

What if there were a run on a bank and no one knew? In recent days, some U.S. media have focused on a “silent run” on the deposits of Wachovia bank, which is now being taken over, after a bailout plan stalled and its rival Washington Mutual was seized.

Commentators including Nouriel Roubini, professor of economics at New York University’s Stern School of Business, have highlighted the scope for quiet withdrawals by depositors whose assets exceed guaranteed levels.

But in Europe, another high-profile banking failure has drawn attention to a different 21st-century phenomenon: As homes and businesses increasingly manage their finances online, mass withdrawals may be invisible.

Fortis, focus of a cross-border rescue last week, was also in part the victim of a silent bank run, which along with a dramatic fall in its stock prompted Benelux governments to step in and inject cash into the banking and insurance group.

“If Fortis were in trouble, I would transfer my money over the Internet to my parents’ account,” student Frederique Schilte said outside an Amsterdam branch, where she had gone to drop off a bill payment.

In the Great Depression between 1929 and 1933, much of the damage was caused by runs on banks that gained momentum as people saw lines of customers waiting to salvage cash. In Fortis’s case, much of the outflow came at the click of a mouse.

Fortis said it had lost about 3 percent of its deposits since the beginning of this year, both from consumer and business clients, or about $7 billion in euros.

Dutch Finance Minister Wouter Bos noted Fortis had trouble keeping corporate clients and was faced with “increasing liquidity problems in the banking activities.”

“Big amounts were withdrawn by private and business clients, particularly in Belgium,” said Tilburg University professor Sylvester Eijffinger, who is also an economic policy adviser to the Dutch parliament. “The capital supplied [by Benelux governments] was gone and they had to act quickly.”

The intervention seemed this week to have worked.

“We were worried last week, but now that it is now part of the Dutch government, we are staying with Fortis,” said a Dutch customer who declined to give her name but said she and her husband have been Fortis customers for 28 years.

Speed and volume

Britain’s Northern Rock, which last September suffered the first run on the deposits of a major British bank for more than 140 years, saw customers line up over three days at branches when confidence evaporated, creating scenes that one politician said made Britain looked like “a banana republic.”

But branch withdrawals slowed after the government guaranteed savings. The major damage was done by withdrawals by Internet, postal and telephone customers. Almost $25 billion of savings were withdrawn from Northern Rock from the start of the panic until the end of 2007, more than half its retail deposits.

About one-third of the cash pulled out was at branches, but the remaining two-thirds, or almost $17.6 billion, was taken out by non-branch customers.

Whether visible or not, the psychology is the same: Barbara Williams, a retired customer of Northern Rock, was one of hundreds who stood in line outside its branches last year.

“I didn’t initially panic but the more you watch the news and read you think maybe we ought to do it as well,” she told Reuters at the time. “We thought we would do what everyone else is doing. Rightly or wrongly it’s a chance you can’t take.”

The online run may spare banks the damage of customers flooding branches to pull out cash: but funds can be moved even quicker and in far larger quantities with the click of a mouse or a telephone call.

This is one of the concerns behind recent scrambles by governments in Europe to increase depositor sums under guarantee. Ireland and Denmark have offered blanket guarantees to savers, and pressure is mounting on others to follow.

Ironically, it was another Dutch bank, ING, that pioneered the growth of online banking by launching ING Direct over a decade ago: amassing $261.5 billion in savings and current account deposits, it is now the world’s 12th largest.

ING Direct operates without physical branches; customers open and manage their accounts via the phone or Web. It is not active in its home markets because of its existing retail network, and has instead built a business network in North America, Europe and Australia.

Banks have always lent more than their clients hold on deposit, leaving the risk that none would have enough cash to pay out if they all turned up at once. Back in the 1930s, depositors faced losing all their money if a bank collapsed.

Attilio Vianello, now 98, remembers how in the 1930s he had just started a job at Credito Veneto, a small bank based in Padoa, Italy, as the crisis spread beyond Wall Street to Europe.

“Banks were going bust from one day to another and the vast majority of people did not manage to rescue their savings because once they knew, it was too late. They would find the doors already shut,” he recalled.

The electronic equivalent of this would be a server failure, or a Web site shutdown. But executives point out that in any silent run — made possible by electronic money transfer whether through the Internet or wholesale networks — the most damaging aspect is the speed at which business customers can move.

“The so-called silent run on the bank — it’s real,” Carlos Evans, Wachovia’s (NYSE: WB) wholesale banking executive, was quoted as saying in the Kansas City Star newspaper. He said withdrawals started picking up on Sept. 26 and over subsequent days.

“You go from being weakened to in trouble in a matter of days. I don’t think people understand how quickly events unfolded,” he said.

Confidence can return, but often only after dramatic state intervention. Now state-owned, Northern Rock recently had to close to new savers after attracting about $10.5 billion this year from customers drawn by government guarantees.