There is a new wave that is not being talked about much these days: banking panic, or a run on banks. The risk is directly related to a loss of confidence in a commercial bank or, on a larger scale, in the traditional banking system as a whole. What are the consequences of a “bank run”? And what does it mean for holders of the VeraCash Account? Here’s an explanation.

What is a bank run and what are the consequences?

It has happened close to home (almost)

We all remember those images of queues of people in Greece in 2015. Had the new iPhone just come out? Far from it! In the midst of a debt crisis, Greeks rushed to bank branches in their droves to withdraw their funds.

Athens, Greece – 1 July 2015:

Queues for cashpoints just kept getting bigger and bigger.

Some just withdrew a little cash, fearing that the cashpoints would be closed, whilst others removed the entirety of their savings to take elsewhere. Several billion euros were allowed to leave the banking system in just a few days (L’Express, June 2015). That’s what a bank run looks like: a panic-driven act to attempt to safeguard your savings in the event of potential bank failures. Because in certain desperate situations, banks can indeed use the funds in their customers’ bank accounts to pay off their debts. The precedent was set in Cyprus in 2013, which gave birth to the French expression: “cypriotisation” of bank accounts.

For the last ten or so years in France, we have also associated the bank run concept with Éric Cantona. The ex-footballer appealed to French citizens to turn up at their banks in a mass protest on 7 December 2010 to withdraw their money. The aim was simple yet ambitious – to bring about the collapse of the banking system. Spoiler alert: it all just fizzled out. Despite managing to mobilise a virtual protest of hundreds of thousands of people on Facebook, the bank run didn’t happen. Cantona himself only managed a single, symbolic withdrawal on the day.

The consequences of a banking panic

The popular French saying “fear does not prevent danger” is particularly pertinent to a bank run. If it actually goes ahead, it can bring down the banks. This is discussed by YouTuber Pierre Ollier in a video about bank runs: “people fear for the financial safety of their bank or the behaviour of other bank customers. And they scramble to the cashpoints, which can result in the bank failing“. These emotional decisions based on the fear of losing money can have a major impact. This is what happened in 2007 when there was a bank run in the UK.

A good example of this is the banking panic that ensued in 2007 with Northern Rock, a UK bank. After requesting an urgent bailout from the Bank of England, the bank suffered a massive customer defection (as reported in Les Echos in September 2007). The result: panicking customers queueing on the pavement to withdraw their funds and a bank that was subsequently nationalised. It’s interesting to note that this bank run was the direct result of the subprime crisis in the United States: at the time, Northern Rock was the fifth biggest mortgage provider in the UK.

Could we have another bank run?

In the current economic climate, many seem to think that a bank run wouldn’t be possible. It’s a situation that relies on a huge crisis of confidence in the banking sector. However, the sector is backed by central banks and governments who are there to ensure that individuals can retain their confidence (and their funds!) in the banks. We’ve already seen this situation in 2008. An article published on in 2008 stated: “Eurozone finance ministers confirmed that the European Union would undertake all necessary measures to ensure the stability of financial markets and to support banks“. 

However, we do need consider everything in context. The subprime crisis in 2008 was an example of the systemic risk that shadow banking brings to bear on the worldwide banking system. However, since 2008, we can’t really say that the situation has been fully resolved. Even though some banks have demonstrated that they have put controls in place, none of them are fully protected and neither are any of them “too big to fail“.  Many observers are keeping a close eye on the systemically important European financial institutions, notably Deutsche Bank, which took a big hit when the subprime crisis hit. A vulnerability that was highlighted in the TV series “Bad Banks”. At times of crisis, of course, the powers-that-be take necessary steps to maintain confidence, but how far can they go? And can these “necessary steps” involve people’s assets?

What would happen if there were a bank run? No need to panic about your holdings in precious metals

Let’s take the example of a catastrophic scenario, like a financial crash due to a pandemic, for example. Everyone is looking to withdraw their funds from their bank both to secure their everyday finances and to protect their funds. The government might decide to limit or even block withdrawals, putting a ceiling on transfers between accounts or to foreign countries. They might even resort to plundering individuals’ savings. 

There is, however, no need to panic about the precious metals bought using your VeraCash® account. Even if the banking system is blocked and cash withdrawals aren’t possible, you can still continue to use your VeraCash® account to transfer money to other people or to businesses (and vice-versa). The VeraCash® model is entirely based on tangible assets and this enables us to manage our transactions without using a payment card. Your precious metals can therefore always be used as a payment method, thanks to the asset transfer functionality. What’s more, they will remain accessible in your account: they are stored in vaults within a duty-free zone at Geneva Free Ports in Switzerland and the French government has no right to confiscate them to repay any of its debts. This means that you can always hold onto your precious metals for as long as you wish, or withdraw your VRC currency wherever you are in the world, without fees.