Banking crisis. What should borrowers and savers do? Panic hurts investors more than crisis. What rumors should you NOT believe? Reasons for investor panic
They discussed at a round table in “Arguments and Facts” what rumors should not be believed. Chairman of the Federation Council Committee on Financial Markets and Monetary Circulation Dmitry Ananyev And General Director of the Deposit Insurance Agency Alexander Turbanov.
Where do the rumors come from?
The main reason for the panic that arises among those who at least somehow care about their money, the round table participants named low awareness of the population. And, first of all, about those state guarantees that today stand behind every deposit of individuals.
“We have a deposit insurance system in our country,” recalled Alexander Turbanov. — The amount of 700 thousand rubles, which is the maximum amount of insurance compensation, covers 98.6% of all deposits of Russian banks. Therefore, there is no reason to panic. ()
The second source of rumors in the market is banal sabotage. In his message to the Federal Assembly, Dmitry Medvedev himself once again recalled: depositors lined up in huge queues at ATMs, “having heard somewhere” that the bank was on the verge of ruin. But in fact, experts say, competitors have come to the rescue.
“In a number of regions, targeted rumors are spreading that one or another bank is on the verge of bankruptcy,” says Tubanov. — People receive SMS messages, advertisements are posted like “Urgently take your money from such and such a bank, it will soon go bankrupt.” These actions can not only create panic, but also “crash” normally functioning banks.
What to do?
Rumors are really growing like mushrooms now. Either the dollar supposedly will jump to 40 rubles in a week, then a large foreign bank seems to be almost bankrupt, or the Russian government is almost preparing the country for default. The investor’s tactics in such conditions are very simple, experts say: do not add fuel to the fire and do not spoil your own position with rash actions.
“The first thing that can be advised to an investor is not to panic,” says Turbanov, “because only wrong decisions are born based on panic.” The actions of those who are now withdrawing deposits from banks are extremely wrong and primarily cause damage to the depositor himself. For example, if a depositor withdraws his time deposit from the bank, then he loses the interest that the banks promised him - this is the first damage. If he, having withdrawn the deposit, puts it under his pillow, then he loses on inflation, which is exactly what he was afraid of - this is the second damage.
“A person who in a hurry withdraws his money from the bank, fearing a crisis, in addition to causing damage to himself personally - losing interest and future earnings - also causes damage to the national economy,” adds Dmitry Ananyev. — Of course, it’s difficult to think about the state from the point of view of your personal budget, but you still need to remember that withdrawing money from the banking system is damaging the economy of our country and creating panic. And this will directly negatively affect our well-being.
The round table participants especially warned against risky transactions with currency. Now, when the dollar is jumping up and down, many clients have transferred their savings into foreign currency - in the hope of not losing during the crisis, but rather making money. At the same time, if the bank goes bankrupt, the insurance compensation will still be paid to you in rubles at the rate established by the Central Bank. Therefore, experts advise not to play around with dollars and, again, leave your deposits alone.
— If a depositor takes a ruble deposit from the bank to exchange it for foreign currency, he, firstly, loses interest. Secondly, he runs and exchanges rubles for foreign currency and loses on commissions. Thirdly, he will probably have to spend this money in rubles, so he again runs to the exchanger and loses on commissions a second time. In general, it’s a total loss for the investor,” Turbanov concluded.
Who to believe?
The fear that banks will go bankrupt one after another is not the only one that has been circulating among people over the past two months. Russians are afraid of being left not only without deposits, but also without loans. Banks are allegedly completely curtailing their credit programs, not transferring funds on credit cards, and recently information appeared in the press that 80% of financial institutions have stopped lending to clients altogether. However, Dmitry Ananyev hastened to dispel these rumors.
— I would not dare to name such figures as 80%. The banking sector and its services need to be clearly divided into segments. For example, there is consumer lending. And, according to my estimates, more than 60-70% of banks here continue to issue loans, and maybe more. There is lending to small and medium-sized businesses - and here, too, money continues to be issued. Only the volume of issuing large loans to corporate clients is being significantly reduced,” the expert concluded.
It’s not very happy, however, the situation is also with the mortgage. As the round table participants admitted, banks will indeed issue less and less “long-term” money, that is, long-term loans. And the huge cash injections that the state is making into the banking system are not yet capable of reviving the housing lending sector. And the real economy itself too.
“Unfortunately, the measures taken by the government, although they help the banking sector, are acting somewhat late,” says Dmitry Ananyev. — That is, if at the first stage financial assistance was allocated to 3-4 state banks, then after 4 weeks 116 banks already received access to state funds, but it would have been right to do this from the very beginning. That’s why now we are talking about breaking through, as I said, financial blood clots. This means that money must not just flow from the Central Bank to the bank - it must be of an appropriate period so that the real economy can be credited with this money. Unfortunately, at most auctions, which were previously held by the Ministry of Finance and are now held by the Central Bank, money is placed for a period of 5 weeks. And this, of course, is very little - and the money does not fully reach the real sector.
» – rapid and massive withdrawal of deposits in one or more banks, usually leading to the collapse of a credit institution.
A banking panic may arise from a fundamental contradiction in the modern financial system: banks hold deposits that can be withdrawn immediately, but invest in assets that cannot be immediately sold (at least without significant losses). As a result, the financial position of the bank is almost always unstable, and its activities can continue only as long as depositors express confidence in the credit institution. But if a significant portion of depositors have doubts about the stability of the bank, they withdraw their deposits, which leads to a deterioration in the position of the financial institution. In turn, this causes fear among other depositors, who withdraw their deposits, further worsening the bank's position, and this continues until the bank loses the ability to return deposits and is liquidated.
One of the main dangers of a bank run is the high probability of panic spreading from one (possibly truly problematic) bank to others (possibly completely healthy). Banks are closely linked to each other by a system of mutual obligations, so the collapse of one institution (especially a large one) leads to losses for others. At the same time, due to the complexity and non-linearity of financial ties, it is not always possible to understand from the very beginning how the collapse of a bank will specifically affect its partners. In such a situation, the appearance of even unfounded rumors about losses of a particular bank associated with the victim of a bank run can cause panic among the depositors of the new bank - and further throughout the system.
The mathematical model of bank run was developed and published in 1983 by American scientists Douglas Diamond and Philip Dybvig. They came to the conclusion that the collapse of a bank could become a self-fulfilling prophecy and would not depend on the real quality of assets and the level of work of bank specialists. A rational investor who learns of the onset of panic among other investors understands that even if the credit institution is performing very well, the withdrawal of a relatively small part of the deposits will make its condition unsustainable and call into question the possibility of returning deposits in the future. Therefore, a rational investor will try to withdraw his money before others, increasing the panic with his actions, even if he himself does not want this.
See what “Banking panic” is in other dictionaries:
Banking panic- (bank panic) - a manifestation of rush demand in the banking sector, characteristic of periods of economic crises. The mechanism of its occurrence is simple. Typically, only a small portion of investors withdraw money from their accounts at any one time, and... Economic-mathematical dictionary
banking panic- Manifestation of rush demand in the banking sector, characteristic of periods of economic crises. The mechanism of its occurrence is simple. As a rule, only a small part of investors simultaneously withdraw money from their accounts and the money remaining with... ... Technical Translator's Guide
Banking Panic of 1907- Crowds on Wall Street during the banking panic of October 1907. Federal Hall with the George Washington monument is on the right. The Banking Panic of 1907, also known as the Panic... Wikipedia
Banking Panic of 1792- This page requires significant revision. It may need to be Wikified, expanded, or rewritten. Explanation of reasons and discussion on the Wikipedia page: For improvement / September 6, 2012. Date of setting for improvement September 6, 2012. ... ... Wikipedia
Banking system- (Banking System) The banking system is a set of banks, credit institutions and individual economic organizations operating in the country, which operate according to the uniform rules of the country’s monetary policy. Definition of the banking system, ... ... Investor Encyclopedia
PANIC- PANIC A sharp and unreasonable drop in confidence in banks and creditors, uncertainty in their ability to fulfill their obligations, accompanied by strong agitation. In Finnish history of the United States, it was more Finnish than... ... Encyclopedia of Banking and Finance
US Economy- (U.S. Economy) The US economy is the largest economy in the world, the locomotive of the world economy, determining its direction and condition. Definition of the US economy, its history, structure, elements, periods of growth and collapse, economic crises in America... Investor Encyclopedia- Stock market crisis is a sharp and sustained drop in stock prices over a short period of time. The cause of crises is the excessive swelling of fictitious capital, a strong overestimation of the real value of securities. A stock market crisis can cause... ... Wikipedia
Two news from the banking sector caused a sensation and caused panic. There are rumors that banks are now allowed not to return their #money to clients and to take away everything withdrawn from deposits earlier, retroactively. Like this arbitrariness allowed by Russian courts and approved by the Russian Central Bank.
As usual, the essence of the original cases that gave rise to it was dissolved a little more than completely in the information noise. Meanwhile, it is precisely this that is important in order to understand whether hunting on private investors and preparation for mass confiscations savings, or the courts protect public interest from too cunning citizens.
Let's figure it out?
So, the case first. In 2015 one the citizen transferred 55.6 million rubles to his account in Sberbank. from his own account at City Invest Bank, and the next day he tried to get it in cash. #Sberbank requested documents from the client confirming the economic meaning of the transaction and the origin of the funds, and based on the results of their study, refused to issue money in cash. Then the client tried to receive the same amount by opening and closing a deposit, but again ran into refusal. The case reached the Supreme Court, which ultimately sided with the bank.
As a result, the public felt that banks allowed do not issue large deposits.
But what really? We look at court decisions.
12/08/2015 to the account of Budnik S.A. received funds in the amount of 55 570 000 rub. from the account of individual entrepreneur Budnik S.A. opened with JSC CITY INVEST BANK, with the purpose of payment “Funds for personal consumption. VAT is not assessed." On 12/09/2015 a request was received for the withdrawal of cash from the account in the amount of 55 200 000 rub. On the same day, PJSC Sberbank of Russia demanded S.A. from Budnik. documents confirming the economic meaning of the transaction and the origin of funds.Budnik S.A. were presented with a software supply agreement No. P1/1307 dated 09/02/2013, concluded with AlfaSharp LLC, a product acceptance certificate dated 03/28/2014, a product transfer acceptance certificate dated 01/12/2015.
The conclusion of the Compliance Department of the North-West Bank of PJSC Sberbank of Russia to Budnik S.A. the order to carry out a transaction in the amount of 55 200 000 rub., since there was reason to believe that this operation was being carried out for the purpose of legalizing (laundering) income, it was recommended to send funds to the account of CITY INVEST BANK JSC.
And one more “small” detail. The owner of AlphaSharp LLC is the wife (now ex) of that same Sergei Budnik.
This is an amazing thing. For years now 20 how #Russia joined the World Convention against Money Laundering. 16 years since the law “On combating the legalization (laundering) of proceeds from crime and the financing of terrorism” has been in force. But people still don’t realize that banks have compliance control, which in some cases requires clients to prove cleanliness the origin of the money, and that the absence of such evidence allows the bank to block questionable funds.
Is there any reason to doubt the case of Sergei Budnik? Well, when an LLC headed by a wife transfers money to... left agreements to the account of the husband’s individual entrepreneur, and he transfers them to another bank to his account as an individual and immediately tries to cash them out, there is every reason to suspect diagram or worse. Don't agree?
Case second. The Deposit Insurance Agency began en masse challenge the withdrawal of money by depositors of bankrupt banks and recover funds from them. Thus, as part of the bankruptcy of the Military Industrial Bank, DIA filed more than 50 claims against individual depositors as part of the bankruptcy of Tatfondbank - already about 400 . The conscientiousness of citizens does not play a role - for the court, the fact that the bank has a file of unfulfilled payments at the time of withdrawal of the deposit is sufficient, and it makes a decision to return everything withdrawn back to the credit institution. After which the investor can count on returning only the guaranteed amount in 1.4 million rub. And the rest is only within the framework of enforcement proceedings, that is, almost nothing in practice.
It sounds menacing, but what is it really?
Well, Firstly, DIA claims to 50 -ty of 78 thousand. VPB depositors ( 0,06% of the total) and 400 -m of 383 thousand depositors of the TSE ( 0,1% ) quite difficult to calculate massive. Secondly, all these lawsuits are filed against excesses– to those clients of the failed banks whose funds in their accounts exceeded the state-guaranteed threshold. AND thirdly…
If someone, shortly before the license was revoked, withdrew money from the bank when there was actually a card index, it could be a person who simply came to the bank to pick up an expired deposit, this is a standard life situation, we do not dispute it. But if a person had a deposit that was supposed to expire in six months, and he withdraws all the funds and loses all the interest, we have questions. This is called preferential satisfaction,” explains Yuri Isaev, general director of the state corporation “Deposit Insurance Agency”.Moreover, in most cases, such questionable transactions were carried out with the participation of the same individual entrepreneurs, hastily transferring money from their business accounts to deposits. Cases were also disputed when, shortly before the revocation of the TSE’s license, large deposits were split up, fictitious transactions were executed for the withdrawal of funds by some depositors and the simultaneous deposit of the same funds into old or new accounts of other individuals.
That is, in case We are clearly talking about what in the language of legal practice is called “illegal transformation of creditors’ claims into a more privileged order of satisfaction.” Humanly speaking, one can understand such people, although who prevented them from initially storing no more than 1.4 million rub., but the law is the law.
And, yes, surprise: the notorious presumption of the investor’s good faith, which many emphasized making noise for the occasion, neither in Russian nor in any other legislation No. And in a civil court, each party itself proves the circumstances to which it refers. Neither Sergei Budnik nor the “crusherers” from the burned banks succeeded.
Maybe because there was no good faith in their actions?
In this article I want to talk about the event that immediately preceded the adoption of the Federal Reserve Act, namely the banking panic of 1907, since many legends and rumors have been created around this event, which conspiracy theorists use in their theories.
It is known that the panic itself began immediately after the collapse of the large trust company "Knickerbocker Trust Company". Various conspiracy theories claim that this company was deliberately bankrupted by first spreading rumors that the company was on the verge of bankruptcy, after which depositors flocked to withdraw their deposits. In particular, this theory was voiced in a documentary film directed by Peter Joseph called "Zeitgeist" (Spirit of the times).
So what really happened?
But in fact, the emergence of the crisis in 1907 was greatly influenced by two events that happened long before:
- The first blow to the American economy was dealt by nature, namely the terrible earthquake in San Francisco on April 18, 1906. Although the epicenter of the earthquake was in San Francisco, in addition to San Francisco, other nearby cities were also affected, such as San Jose, Santa Rosa, etc. In Monterey County, for example, the earthquake forever changed the course of the Salinas River near its mouth. As a result of this earthquake, more than 3,000 people died, more than 300 thousand were left homeless. The economic damage was enormous. Insurance companies were forced to make huge payments, many of them went bankrupt. This could not but affect the financial markets. Here's what the Financial Times wrote about it on July 6, 1906:
San Francisco's $200 million "ash pile" will cause difficulties that will be felt throughout financial markets for many months
- That same year, another thing happened. European banks raised their discount rates, resulting in an outflow of money from American financial markets in the face of a liquidity shortage, which in turn arose as a result of the huge funds allocated to rebuilding San Francisco after the earthquake.
In April 1906, the San Francisco earthquake and fire caused damage equal to more than 1 percent of GNP (gross national product). Although the real effect of this shock was localized, it had international financial consequences: large quantities of gold flowed into the country in the fall of 1906 as foreign insurers were forced to pay out insurance claims to their clients in San Francisco. This outflow prompted the Bank of England to take discriminatory actions against American finance and, along with other European central banks, to raise interest rates. These policies pushed the United States into an economic recession and laid the groundwork for the Panic of 1907.Next:
The actions of the Bank of England and other European central banks attracted gold imports and sharply reduced the flow of gold into the United States. As of May 1907, the United States was in one of the shortest but most severe recessions in American history. Thus, the preconditions for the emergence of a financial crisis were created. Already weakened, world markets collapsed in October 1907 with the collapse of the Knickerbocker Trust Company in New York."This is the picture of the crisis that actually emerges.
Now specifically about the banking panic. More details of its origins can be found in the work entitled “Lessons from the Panic of 1907”. In this article I will briefly outline all the circumstances of those events.
In fact, the panic began not with the fact that someone spread some rumors, but with the fact that the Knickerbocker Trust Company, or rather the company's president, Charles T. Barney, entered into a deal with speculators - the brothers August and Otto Heinze, as well as Charles Morse with the goal, as they write in American sources, "cornering the market"
copper producer company - "United Copper".
I specifically highlighted the words "cornering the market" to explain what this means. The website "InvestorWords.com" gives the following definition:
"The illegal practice of attempting to purchase a sufficient amount of a commodity or security to manipulate its price."
Translation:
"Illegal
the practice of attempting to acquire enough of a commodity or security to manipulate its price."
In short, as they say now, it was a bubble blowing.
So what happened next? Before I continue, I would like to make one clarification:
In the USA there is an organization called "Clearing House". The website "Online Business Dictionary" gives the following definition:
"Affiliated agency or a facility operated by banks within a geographical area to act as a central site for collection, exchange, and settlement of checks drawn on each other."
Translation:
"An affiliated agency or institution used by banks within a geographic area to act as a central hub for the collection, exchange, and settlement of checks drawn by banks on each other."
In addition, there is a body called the "Clearing House Committee", which controls the activities of banks in this region.
So, further, as a result of the fact that speculators either poorly calculated the consequences, or greed ruined it, the bubble burst, and United Copper shares fell sharply in price, causing the collapse of the entire stock market. Everything would not be so scary if not for one circumstance. The fact is that August Heinze, among other things, was the president of the Mercantile National Bank. Since the case became public after the stock market crash, depositors flocked to the Mercantile National Bank to withdraw their deposits. (In English this situation is called "bank run" or "run on the bank").
After this, the Clearing House Committee urgently appointed a commission that was supposed to investigate all the circumstances. After the commission completed its work, the Clearing House Committee decided to provide assistance to the Mercantile National Bank, but on the condition that August Heinze resign from his post. In addition, Charles Morse also had to leave all his posts that he had previously held in various banks. Naturally, both fulfilled these requirements and the bank was saved.
And now directly about the Knickerbocker Trust Company:
Since the Knickerbocker Trust Company was not a bank, but, as its name suggests, a Trust Company, its activities were not subject to regulation by the Clearing House Committee. On the other hand, since trust companies were not banks, they could not clear their checks through Clearing House, so they used intermediary banks. For the Knickerbocker Trust Company, that intermediary was the National Bank of Commerce. So, as soon as the findings of the Clearing House Committee were made public, the board of directors of the Knickerbocker Trust Company demanded that Barney resign. Soon, the National Bank of Commerce announced that it would no longer accept Knickerbocker checks. It was this decision of the National Bank of Commerce that caused the panic.
In 1907, their (Knickerbocker Trust Company) funds were used by then-president Charles T. Barney to increase the value of copper by "cornering the market." It was a gamble unraveled by dumping millions of dollars into the copper market to stop a hostile takeover by an entirely different entity. This became public knowledge, and on October 21, the National Bank of Commerce announced that it would stop accepting Knickerbocker Trust Company checks, causing panic among depositors who began demanding their funds back. Charles Barney asked for a meeting with JP Morgan to discuss bailing out the bank, but JP Morgan turned him down. Because of this and the bankruptcy of the bank, he shot himself on November 14, 1907.
In conclusion, I would like to clarify the situation with the fact that JP Morgan refused to help Knickerbocker Trust Company. In fact, on October 21, Morgan gathered all the company's management and asked them to provide the company's financial statements in order to make a decision on whether to provide assistance. However, this was not done in a short time, and without this information Morgan refused to provide assistance.
By the way, Morgan himself also suffered from the crisis. For example, the shares of the company he owned, U.S. Steel, fell by more than 50%, and yet he still had enough money. But an example of someone who benefited from this crisis is described. When the panic arose, huge queues formed outside the banks, and some people sold their place in line. Maybe it was they who created this crisis in order to earn money in this way? I think this hypothesis can also form the basis of a conspiracy theory.