Why Banks & Governments Hate Cash: Bank Runs
The photos from Greece showing long lines at ATMs are astonishing. Even after the deposit outflows from Greek banks over the past weeks, there are still large numbers of people who are trying to get their money out of the banking system. With the banks closed, ATMs are the only way for people to get any cash. Let’s not beat around the bush in describing what is happening: this is a bank run. Even though Greece has a deposit insurance scheme that covers up to €100,000 in savings accounts, trust in the banking sector is declining and people are trying to get their money out. Cash is the ultimate means by which consumers can restrain the behavior of governments and banks, which is why governments and banks are doing everything they can to do away with cash.
The problem with the banking system is that banks today operate as fractional reserve banks. Money deposited into savings accounts is loaned out up to the bank’s reserve requirement. If the reserve requirement is 10%, then 90% of the money in savings accounts is loaned out. If the reserve requirement is 3%, then 97% of the money in savings accounts is loaned out. The problem comes about in that the bank simultaneously gives the full use of that money to borrowers, often lending at long terms up to 30 years in the case of mortgages, while still telling depositors that they can withdraw their money at any time. So what happens when depositors want to withdraw more money than the bank has on reserve? The bank tries to refuse to honor withdrawal requests. Then the public loses confidence in the bank, depositors line up to demand their money, and you have a scene out of “It’s a Wonderful Life.”
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