Glamor Economics

Chapter 118

Chapter 15 Section 9 The Nightmare Brought by the Run on Banks - Banking Crisis

China Commercial Bank is the first Chinese-funded private bank in China to issue banknotes in the modern sense. At the beginning of the 20th century, there were many Chinese and foreign banks in Shanghai, and China Commercial Bank, founded in 1897, was one of them.Its founder and major shareholder is Sheng Xuanhuai.China Commercial Bank is headquartered in Shanghai.The Qing government gave it the power to print and issue banknotes.But in its history, the first counterfeit banknote case occurred in the history of modern Chinese banks, which triggered the first wave of bank runs in modern Chinese history.

The 29th year of Guangxu in the Qing Dynasty, that is, 1903.It is said that in the Commercial Bank, a banker took some Commercial Bank banknotes to exchange, but was found by the counter that there were several counterfeit ten-yuan banknotes, and refused to exchange them on the spot.Another theory is that someone went to a store with counterfeit banknotes, and the shopkeeper later found out that they were fake.Some even said that the counterfeit banknote holders were Japanese.After the news of the counterfeit banknotes spread, many people holding banknotes from the Commercial Bank feared that the money in their hands would become a pile of waste paper, and rushed to exchange them for cash.At that time, the Bank of Shanghai and the bank co-existed, and the bank gloated over the matter and refused to use the banknotes of the China Commercial Bank.The next day, there was an unprecedented wave of runs in Shanghai.

The next day, when the run broke out, the Commercial Bank found counterfeit banknotes again, and the bank staff tore them up on the spot and stamped them with the words "counterfeit banknotes".In order to appease the citizens, the Commercial Bank also specially sent people to paste the counterfeit banknotes next to the door, and posted a note on how to identify counterfeit banknotes.However, currency holders are still panicking.Sheng Xuanhuai, the major shareholder of the bank, ordered the bank to make withdrawals at any time, because a run on the bank would cause its reputation in the entire financial world to plummet, and the consequences were unpredictable.But just a few days after China Commercial Bank opened its doors to "welcome" cashing out, there was not much cash left, so we had to ask HSBC for help.Finally, with the gold and silver in stock as collateral, he exchanged 70 taels of cash silver from HSBC, and weathered the storm with difficulty.Afterwards, the investigation results of the counterfeit banknote case showed that it was a Japanese businessman who forged the counterfeit banknote.Sheng Xuanhuai had negotiated with the Japanese government in order to severely punish the counterfeiters, but in the end it was still nothing.

Runs are the fatal "soft underbelly" of banks.The deposit business is the basic business of the bank. For the deposits deposited by customers, each bank only reserves a very low percentage of reserves for depositors to withdraw, and most of the deposits are used for profit-generating assets such as lending or investment. , to earn income, facilitate the payment of deposit interest and various operating expenses, and distribute dividends and bonuses to shareholders.A low reserve ratio for banks will certainly increase the bank's profitability, but it will also increase the risk of bank failure due to insufficient liquidity.Therefore, when a run occurs, the bank will face enormous payment pressure.This is why a run can easily trigger a crisis in the entire banking system.

From June to July 2004, Guta Bank, one of the most reputable private banks in Russia, encountered a crisis of trust and a run on bank.At that time, the Central Bank of Russia announced to rectify the banking market and revoked the business license of a bank.Rumors immediately appeared in the society, and there were rumors that Guta Bank had entered the "blacklist" of the Central Bank of Russia for governance and rectification.As a result, depositors began to lose trust in Guta Bank, and since June, Guta Bank began to experience a run on it.However, in order to stabilize the confidence of depositors, Ghouta Bank refused to admit that it was facing a payment crisis. At the same time, the bank urgently mobilized funds to deal with the run.However, the temporarily injected funds were quickly sold out. On the morning of July 6, the spokesman of Guta Bank swore that he had just successfully withdrawn cash from the ATM. However, at noon, Guta Bank reported to the Central Bank of Russia : It's over, we're shutting down!Although the Guta Bank was "strong and healthy", it was finally on the verge of desperation.Acquired by VTB Bank.

So why do runs happen?There are two reasons for the run: one is that holders of bank notes or depositors have shaken the credit of the issuing bank and have withdrawn their deposits one after another; out to prevent major economic losses.It is often accompanied by the phenomenon of widespread withdrawal of deposits, and further forms a financial trend.

Historically, a wave of bank runs is usually accompanied by a credit crisis.Before World War II, credit crises were generally accompanied by periodic crises of overproduction.Due to the rising commodity prices and good profits during the industrial boom, a large amount of credit was used by speculators to engage in speculative activities, and the credit expansion greatly exceeded the growth of production.And when the economic crisis of overproduction breaks out, a large number of goods are unsalable, commodity prices drop sharply, production stagnates, the market shrinks, and credit will shrink sharply.In this case, if the chain relationship of creditor's rights and debts is interrupted, the entire credit relationship will be destroyed, resulting in a credit crisis.Not only did periodic overproduction crises cause periodic credit crises, but credit crises also deepened overproduction crises.The standstill of commercial credit and the confusion of bank credit made it more difficult to sell surplus goods, thus sharpening the crisis of overproduction.In addition to the periodic credit crisis caused by the economic crisis of capitalist overproduction, there is also a special type of credit crisis mainly caused by wars, coups, and famines.

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Run Under the influence of the credit crisis, depositors and bank note holders compete to withdraw cash and exchange cash from banks and bank note issuing banks, which is an economic phenomenon called a run.When depositors experience an unusual phenomenon of a large number of withdrawals of deposits, and the bank's cash reserves and liquidity assets are not enough to support customers' withdrawals, it is necessary to discount their realizable low-liquidity assets for cash, and thus bear a huge amount of money. Realization loss.This phenomenon is a manifestation of the currency credit crisis under the condition of metal currency circulation.

(End of this chapter)