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Is a bank safe? There is also a common belief among lenders that their capital is safe. In absence of a government or similar state authority providing such a guarantee, this can be far from case. At university one of cases we studied, was that of a particular savings bank. A rumour went around city that bank was in trouble. A great number of people went to bank to withdraw their savings. Those that represented first few % of total deposit had no problem. When percentage rose to 6%, which in this case was amount decided by “the owner of box”, rumour became fact in that there was no cash to pay out to depositors. As this was in a country in which owners of all boxes were members of a club, aim of which was to protect undeserved, but perceived, reputation of said members, members sent round security vans with sufficient cash to pay out all those who people who “had taken notice of an unfounded rumour.” Things quietened down after a while, and government decided to introduce legislation to create a minimum liquidity level.
Another case we studied was that of one of world’s largest banks, board of which was mainly composed of greedy souls. They had decided that stock market was a good place to keep liquidity margin, so that in event of a bear market, they could create more profit for shareholders. A sudden bear market wiped out liquidity margin, and bank came within a hair’s breadth of going belly up.
Once bank has reached a substantial size, liquidity should be sufficiently large to cater for all such panic withdrawals, unless of course panic is as great as 1929.
For borrower it provides a necessary service, and apart from penal conditions imposed on borrowers, is a vital service to our society. From investor’s point of view, it depends firstly on mentality of treasury function within bank, and secondly legislation that governs their actions and accountancy practices. From investor’s point of view, considering investing in stock of such an organisation, it depends entirely on an analysis of bank’s net worth and profitability. Both examples mentioned above have since gone from strength to strength, and have since been bought for more billions that most of us can count.
© Jenny Barclay
Jenny Barclay majored in math. and economics, and obtained a masters in viability of banking institutions. She is currently studying Spanish in Andalucia, Spain. This article may be reproduced on websites subject to credit being given to the author, and a link to her website.
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