BANKING CRISES

Remember the movie it’s a wonderful life?
It points out something that many people don’t understand. Your money is not in the bank. When you make a deposit, the bank turns around and lends that money to someone else. So, if everyone suddenly shows up to take out their money, the bank does not have the cash on hand to return their money.

The thing about a bank panic is that even a strong well capitalized bank can fall when faced with a “run on the bank.”

I first noticed signs of a panic about a month ago when the foreign exchange booths around town were mostly buying dollars and claiming that they had no dollars to sell. Banks have been offering 18% on Hryvna accounts and 12% on dollar accounts. This is about a 10 percentage point risk premium over normal rates. By the way, only domestic Ukrainian banks offered these rates, subs of foreign banks offer a fraction of these rates. That should warn you that something is wrong.

You know there’s a problem when you sell your dollars for Hryvni, the local currency, and then they tell the next person in line that they have no dollars.

One way to starve a panic is to build confidence. The central bank can push liquidity into the country and insure that all banks have enough currency on hand. Especially in whatever currency is on hand.

I have seen evidence of this prudent practice at the foreign bank subsidiary where I am lucky enough to bank. Its business as usual and you can withdraw cash as you like. However, I will say that when I visited my bank yesterday, they had three rows of chairs in the lobby, which they never had before; and, instead of the normal two or three customers, there was over thirty people there. A bank official said that this had never happened before.

I think that it is interesting that for the past month my withdrawals of dollars have resulted in new bills. I mean sequentially numbered; never been touched by the public; from cash bricks still wrapped in plastic; fresh from the US Treasury; new hundred dollar bills.

Unfortunately, at domestic Ukrainian Banks, there is a different situation. The central bank has placed limits on access to bank deposits. They claim that it is in response to a run on banks in eastern Ukraine caused by the announced intention of some eastern provinces to form an autonomous region. I believe that there is an additional force at work. Many people have said that Yushchenko supporters have been withdrawing their funds from banks controlled by the oligarch/gangster backers of Yanukovich. (If true, I think that this is an incredibly effective nonviolent action, although it may have unforeseen consequences.)

1) The Central bank has placed a $1,000 limit on foreign exchange (Read buying dollars or euros.) IF you can find someone that will sell.

2) Withdrawals are being limited to $300.
If you have a time deposit, you can’t close it early like normal. You have to wait for it to mature.

Good luck on trying a cash machine, they’ve been cleaned out.
On the black market, dollars have been selling for 8 to 10 Hryvna per dollar instead the normal 5.3.

Well, I hope that this banking situation doesn’t hurt anyone. Unfortunately, I believe that the banking situation is going to get worse.