Slow Motion Bank Jog In Spain Not As Bad As It Seems: BBVA

A slow-motion bank run on Spanish finance -- called by some a “bank jog” or “bank walk” -- has of late become one of the most-discussed bullet points in the long list that could bring on the implosion of the world's financial system. But the second-largest Spanish bank said in a report Monday that fears of the collapse of deposit bases in that country have been greatly exaggerated.

Bank runs, where depositors withdraw funds from a financial institution seen as insolvent out of fear it is heading for bankruptcy, are a self-fulfilling tragedy of the financial system. Because banks hold only a fraction of their total balance sheets as deposits, a large enough bank run will deplete even a formerly healthy financier of its cash reserves, force a fire sale on its assets and push it into ruin.

Short of a Marxist revolution, they are a banker’s worst nightmare. And even though they are known as purely psychological and counterproductive phenomena, they have been a feature of every banking panic, from the flare-ups of the late 1800s to the Great Depression to the global financial crisis of 2008.

The banks on the peripheral countries in the euro zone, particularly Greece and Spain, have been experiencing long-timeline versions of a systemic bank run. The reason is simple: With European leaders bandying about the idea that certain countries could eventually be kicked out of the euro -- a possibility that would mean euro deposits in those countries would be forcibly converted to national currency -- depositors have decided it’s just too risky to keep their assets there.

The flight of deposits has been noted by various bank economists.

“Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,” Alberto Gallo, the head of European credit research at the Royal Bank of Scotland, told Bloomberg recently.

Spanish banks have been particularly badly hit, with deposits falling 7 percent in the first six months of the year, and 4 percent in the six months before that. The rate of flight has only accelerated since.

“Deposit outflows are clearly picking up, and the balance sheet of the Spanish banking system is contracting,” Julian Callow from Barclays Capital told London’s Telegraph last month, after the figures for deposit outflow that exceeded previous records were released.

But other analysts say the histrionics over the flight of cash from Spanish deposit ledgers fail to take into account important factors.

In a note Monday, giant Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), noted that while the total of deposits held in Spanish credit institutions had “decreased significantly in August,” the biggest fall was due to hot money from speculators and foreign companies, not Spanish consumers.

The bank states the latter deposits “are the ones that matter in order to analyze a potential deposit run” and were staying put. Indeed, BBVA believes the deposit outflow had little to do with the increase in perceived risk but derived from “an increase in redemptions of securitizations, mainly for reasons of collateral management” by non-bank financial players.

The BBVA report states that, while deposits at Spanish banks dropped by €40 billion in August, the latest reported month, “in a nutshell, Spanish households and non-financial corporations have increased their deposits slightly by €1bn.”

Of course, as the second-largest bank in Spain, BBVA has a lot of skin in the game, so their analysis can be taken with a grain of salt.

But they are not the first to claim the talk of a Spanish bank jog is wildly overblown. Last month, Carlos Garcίa, a senior banking analyst at Societe Generale, wrote in a note to clients that much of the drop in deposits seen in July was driven by a change in regulation that caused depositors to shift money into short-term bonds, which are still held by the bank but not counted as deposits, according to CNN.

Pedro Schwartz, an economics professor at San Pablo University in Madrid, noted last month there might be “a little bit of an exaggeration” over the Spanish bank withdrawal figures.

“I don’t think we can speak of a bank run at the moment, not by far,” Schwartz told BBC Radio Channel 4.

One reason the professor is not concerned: The withdrawals are not being made by Spanish consumers and, in his view, won't be any time soon.

While banks and corporations might be experts at moving cash around, “the thing with ordinary people is that they wouldn’t know at all how to take their money out of Spain. It’s not that easy,” he said.