Credit crisis has hallmarks of classic bank run
Krishna Guha FT.comMonday Sept 3, 2007
The turmoil in the financial markets has all the characteristics of a classic bank run but one that is taking place outside the traditional banking sector, Axel Weber, Bundesbank president, said at the weekend.
"What we are seeing is basically what we see underlying all banking crises," said Mr Weber, one of the most influential members of the governing council of the European Central Bank.
The comments mark the first time that a top central banker has endorsed the notion that the non-bank financial system is seeing an old-style bank run.
Some US Federal Reserve policymakers also privately see comparisons between the distress in credit markets and the bank runs of the 19th century, in which savers lost confidence in banks and demanded their money back, creating a spiralling liquidity crisis for institutions that had invested money in long-term assets.
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That scenario ultimately led to the creation of the Federal Reserve and other central banks as lenders of last resort for the banking system.
However, the tools that modern central banks possess to ease liquidity problems can only directly address such runs inside the traditional banking sector.
Mr Weber's analysis highlights the dilemma facing central banks, which cannot channel funds directly to the non-bank financial sector, and maytherefore have to resort to easing monetary policy.
The ECB is due to set its key interest rate on Thursday and the Fed the week after.
Mr Weber told fellow central bankers and economists at the Fed's Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil in the markets is that the institutions most affected at the moment are conduits and structured investment vehicles raising funds in the commercial bond market, rather than regulated banks.
These entities were inherently vulnerable to a sudden loss of confidence because "there is a maturity mismatch" on the part of financial institutions that have invested in long-term mortgage-backed or asset-backed securities using short-term finance.
In many cases sponsoring banks are being forced to take risky assets back on to their balance sheets, in turn causing banks to keep hold of their own cash, putting pressure on short-term money markets, he argued.
Krishna Guha FT.comMonday Sept 3, 2007
The turmoil in the financial markets has all the characteristics of a classic bank run but one that is taking place outside the traditional banking sector, Axel Weber, Bundesbank president, said at the weekend.
"What we are seeing is basically what we see underlying all banking crises," said Mr Weber, one of the most influential members of the governing council of the European Central Bank.
The comments mark the first time that a top central banker has endorsed the notion that the non-bank financial system is seeing an old-style bank run.
Some US Federal Reserve policymakers also privately see comparisons between the distress in credit markets and the bank runs of the 19th century, in which savers lost confidence in banks and demanded their money back, creating a spiralling liquidity crisis for institutions that had invested money in long-term assets.
(Article continues below)
document.write('');
That scenario ultimately led to the creation of the Federal Reserve and other central banks as lenders of last resort for the banking system.
However, the tools that modern central banks possess to ease liquidity problems can only directly address such runs inside the traditional banking sector.
Mr Weber's analysis highlights the dilemma facing central banks, which cannot channel funds directly to the non-bank financial sector, and maytherefore have to resort to easing monetary policy.
The ECB is due to set its key interest rate on Thursday and the Fed the week after.
Mr Weber told fellow central bankers and economists at the Fed's Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil in the markets is that the institutions most affected at the moment are conduits and structured investment vehicles raising funds in the commercial bond market, rather than regulated banks.
These entities were inherently vulnerable to a sudden loss of confidence because "there is a maturity mismatch" on the part of financial institutions that have invested in long-term mortgage-backed or asset-backed securities using short-term finance.
In many cases sponsoring banks are being forced to take risky assets back on to their balance sheets, in turn causing banks to keep hold of their own cash, putting pressure on short-term money markets, he argued.
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