Friday, February 6, 2015

This Week in Bank Failures

Could a cascade of international bank failures start in Russia or Greece?

There is concern in Europe about these two countries on the edge of the continent — Russia because the country has put the financial condition of its central government at risk in a desperate bid to keep its entire banking system standing, and Greece as it attempts to renegotiate the terms of its international bailout while large blocks of sovereign debt are held by the largest banks there.

The ripples of a banking system collapse in Russia or Greece would not reach far, however. Neither country is enough of an economic heavyweight to make much of a dent on Europe as a whole. In Greece less than half of the banking system is at risk of insolvency if Europe cuts loose Greece’s web of bridge loans. In Russia the central government has some experience in replacing failed industries. The Wall Street hedge funds that have bet heavily on Greece might go under, but this would barely be noticed by anyone not owning those shares; the two or three banks in Vienna that would take a hit in the event of a total banking collapse in Russia could be propped up with only a touch of support from outside that country.

Large depositors, though, have reason to worry, and deposit flight from the more troubled banks in the coming weeks is something to watch for.