A Run On Eurozone Banks?

By Claus Vistesen

The Calafia Beach Pundit raises an interesting question in relation to the recent surge in the US money supply, which he suggests might be a reflection of a scramble for USD assets. More specifically, the argument would seem to be that a silent run on European banks is in the works as money is moved into perceived safe USD liquid assets.

As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.

Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don’t know what to do with all the money coming in.

Clearly, the theoretical argument is sound here. In a world populated by different paper currencies, a surge in liquid deposit assets of the reserve currency in times of crisis reflects preference for liquidity and safety. However, the idea that money is now systematically fleeing Europe is new and disturbing. The news last week that the ECB had to supply 500 million USD to an un-named Eurozone bank has added further to the speculation.

However, there are two problems here. Firstly, as Simon Ward points out, the data do not quite support the idea of capital flight from the Eurozone. In particular, one would have expected EUR/USD to have reacted strongly on a flight from the Eurozone to USD assets.

Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.

The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.

Of course, someone else could be behind the bid for EUR/USD (Voldemort?) but we should also observe a blow out in Eurozone interbank spreads. And while we may still see this in the coming weeks, we have not seen anything resembling 2008 levels of panic.

Secondly, Simon Ward points out that even if you adjust for a plausible measure of liquidity preference money growth in the US is still strong which suggests that we cannot linearly equate a spike in the US money supply with capital flight from the Eurozone.

Another point worth considering here is that while the USD certainly must still be considered a safe haven, other currencies have taken up this role, especially in the wake of the debt ceiling debacle which saw the US lose its triple A rating from S&P. The CBP points out in the comments section;

(…) it’s true that the euro isn’t falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.

The ascent of CHF in particular has seen the Swiss National Bank resort to more or less desperate measures to rid its currency of safe haven status since it deems the Swissie to be severely overvalued.

At the end of the day, the answer must be found in deposit growth in the Eurozone. We have observed for a while how the periphery has been bleeding deposits, which, logically, have been moving to the core (or so I assume). But generally, the total stock of money in the Eurozone has been volatile around a flat trend since 2008 which makes it difficult to interpret spikes and dips in the data. I will be looking closely at Eurozone deposit data next and will report back if I find something interesting.

  1. David Lazarus says

    It would not be a surprise that there is a run on euro banks. There has been a silent run if Irish banks for several months and Greece is not far behind. The inherent risks of odious debt defaults will leave core banks nursing horrendous losses and probably fatal ones at that. The unrecognised risk is that the CDS market somewhere is notching up even larger liabilities and there is absolutely no way to cover those liabilities. While there will be matching off of liabilities, once the cracks break in one bank or country the entire financial system will lock up. In fact I doubt that core banks CDS spreads are truly reflecting the actual risks with some of the banks concerned. It is the big banks to be worried about.

  2. Nick says

    I just want to suggest another point of view regarding the Greek deposits run…In my humble opinion a large chunk of the deposits withdrawn are utilised to support consumption. With unemployment that high and stagflation raging these past months is that really a surprise…?
    P.S. Could the spike in M2 be explained by investors moving into cash because of the markets turmoil…?
    All in all congrats for a good post…cheers…

    1. David Lazarus says

      Well institutions have been withdrawing funds because they would not be protected in a bank failure. Individuals will be as you commented be using it to support normal spending. Though many Greeks have also been moving their money out of Greece. They fear a devaluation.

      1. Nick says

        I’m under the impression that High Net Worth’s have probably moved their money to core banks early on…it seems that some people have moved money to Cypriot banks but this trend appears either to have reversed or is about to do so soon..it was nonsensical anyway, it is just that people feel “safer” to move money to places they feel they know better…;-)

  3. Claus Vistesen says


    Thanks for the comments. All interesting points. I agree with Nick. Clearly, the drain in deposits need not be an actual run more so than simply people braking the piggy banks. After all, in a crisis we should be able to explain some part of the fluctuations in money supply endogenously as a function of people trying to smooth consumption (i.e. spending their savings basically).

    Now, I think it is quite clear that the periphery has been bleeding deposits to the core for a while now but I am talking about money moving OUT of euros but then we should see that EURUSD move I guess.

    1. David Lazarus says

      There was a lot of money entering the top end London property market above £1 million for the last year or so from rich Greeks moving money out of Greece. So out of the eurozone into sterling. The majority simply do not have the funds to do so, though they could do it via mutual funds managed in London.

      If greeks are draining their bank accounts and savings to cover living expenses then the real problems will start when they exhaust their funds. How long before George Papandreou leaves in a helicopter like so many former leaders of countries who followed IMF policies of austerity. Enda Kenny could be joining him in his own helicopter at a later date.

  4. Vytautas Vakrina says

    Of course, someone else could be behind the bid for EUR/USD (Voldemort?)

    Cornered BOJ&SNB?

  5. Claus Vistesen says

    Voldemort is PBoC :)


  6. Andrew P says

    The total amount of Euros in EU banks cannot change. It can only be moved from one bank or bond to another. You can’t deposit Euros in US banks, you must convert them to dollars first. If people are selling Euros for Dollars the Euro should be going down, unless China is selling dollars and buying Euros. So, if there is a silent run, China is subsidizing it.

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