A topical article in the FT today on the queues spotted at Metro Bank over the weekend, which received almost viral attention in ‘social media’.
The long queues that formed at several Metro Bank branches in west London on Sunday have been seen by some, especially on social media, as an alarming echo of the days just before Northern Rock’s collapse in 2007. The comparison is irresponsible. This lender’s problems — a few dozen customers emptying their safety deposit boxes amid unfounded rumours of imminent collapse — cannot be likened to those of a defunct bank whose woes foreshadowed the global financial crisis. Conflating them risks creating a vicious circle of customer panic.
The article continues
There are crucial differences with Northern Rock in 2007. Its undoing was its reliance for the majority of its funding on volatile bond and commercial paper markets, not deposits. When those markets seized up, afflicted by fears of a global crisis, Northern Rock was very quickly unable to operate. Metro’s loan book, by contrast, is fully covered by its customer deposits.
Wot so bond and commercial paper markets are volatile, deposit markets are not. Que?
Somewhat more logically, it goes on to say that the deposit guarantee provided by the Financial Services Compensation Scheme will solve everything. If a deposit-funded institution like Metro goes under, depositors will be compensated for any losses by the scheme, ultimately funded by taxpayers. But as Kevin commented here , such schemes contribute to the risk-taking moral hazard that still infects our banking system. The recent ASI paper spells it out.
It has become possible for bankers to privatise benefits and socialise losses through deposit schemes, subsidies, public ownership and expected bailouts in the time of a crisis. This has created a moral hazard: bankers are encouraged by the regulatory regime to take on excessive risk, allowed to issue limited equity, and in case of a crisis, march up to the Treasury to demand a gigantic multi-billion-pound handout.
The article winds up with the idea that the FCA and the PRA should have more presence on social media to stop this sort of nonsense. Does PRA have a Facebook or Instagram page? I checked, and apparently not. Worse, the Australian Prudential Regulation Authority has usurped that domain. Fee Fi Fo and Fum.