Worrying About Large-Deposit Bank Runs

Dealbook gives us something new to worry about:

In Washington Mutual’s case, customers withdrew $16.7 billion in cash from the thrift in the last nine days, according to the Office of Thrift Supervision. The majority of those that withdrew cash were holders of retail deposits that were over the government’s $100,000 insurance cap.

It’s a potentially troubling tale: If depositors that have more that $100,000 began withdrawing their cash all around the country, the banking industry would have a serious problem.

Is this true? If everybody with more than $100,000 on deposit moved their money to one of the Big Three banks (Citi, Chase, BofA), would that cause "a serious problem" for the banking industry as a whole? If such people had $16.7 billion on deposit at WaMu alone, one can only imagine the sums they have on deposit in aggregate at smaller banks and thrifts across America. And if that kind of money moved en masse to the Big Three, there would surely be some huge dislocations in the banking industry.

The statistic doesn’t actually come fromthe OTS factsheet, but rather from the conference call, where an OTS official said that

a majority of the deposit outflows (a) came from the state of California, and (b) were deposits in excess of the insurance deposit limit.

I can certainly imagine that California has more deposits in excess of $100,000 than any other state. WaMu was very big in California, so maybe it was particularly at risk of large-deposit outflows. This is actually reassuring: we don’t need to worry about banks in general suffering large-deposit outflows, just those banks in the richest parts of the country where you’re likely to find large deposits in the first place.

Since the largest bank in California is Bank of America, and the largest banks in the Washington-Boston corridor are Chase and Citibank, there probably won’t be a big problem there. There could conceivably be a problem with Wells Fargo, but since it still has a market cap of well over $100 billion, I doubt it. What’s more, even depositors with more than $100,000 in WaMu are untouched: all deposits, of whatever size, have been taken over by JP Morgan Chase.

Incidentally, one line from the conference call jumped out at me: another OTS official saying that what happened at WaMu "was a liquidity crisis, not a problem bank crisis". The clear implication is that JP Morgan got itself quite an attractive deal and that WaMu was solvent even before its bondholders were wiped out to the tune of $30 billion or so. I can imagine that they’re extremely unhappy right now: expect lawsuits.

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