by James Meadway

Like Greece before it, Spain is going through a slow-motion bank run. Spanish depositors, fearful for the safety of their cash, withdrew €74bn in the last month – a euro-era record, with deposits in Spanish banks falling by nearly 11% over the last year.

Deposits to German banks, meanwhile, have increased by 4.4%. It’s not too hard to see what’s going on – this is capital flight, driven by the prospect of a Spanish banking collapse. Spanish savers no longer trust their banking system to look after their cash, nor do they trust the promises of their (increasingly indebted) government to support stricken banks. They are instead looking to safer havens in northern Europe.

It is exactly this march away from Spanish banks that will make a collapse more likely, since banks starved of deposits cannot sustain themselves. Bank runs – even comparatively slow ones – can become self-fulfilling prophecies.That’s why confidence matters so much to banking systems. If depositors believe banks to be secure, the banks will remain secure. If not, the bank collapses. And if depositors see one bank crumbling, they can start to believe the whole system is at risk – thereby threatening the whole system.

Continue Reading…

Courtesy of http://energybulletin.net