Monday, 17 March 2008

What if?

Mr Badger is not a happy man today. He works in the banking software sector and one of his biggest clients is Bear Stearns...

But the banking sector has every reason to be worried after this weekend's events across the Pond.

Did you know that banks in this country are only required to hold 5% of customer deposits in liquid cash reserves? That means if more than 5% of their customers decide to withdraw their cash and put it under the mattress certain banks might just possibly run out of money. (I discovered this when my FD at Red Lettter Days was arguing against Barclays' rationale to bond 100% of our credit card takings - a £3million pot of money we couldn't touch, which eventually brought the business down due to lack of cash. All it took was a loss of confidence via a few negative media reports, suppliers subsequently withdrawing credit and within days the whole company had collapsed.)

Of course the banks could always pull in monies they have lent out - but with the property market destabilised and so many people in huge credit card debt, just how much of it could they collect without putting scores of people through bankruptcy?

And if the banks run out of cash what happens to all the people who need to get their hands on it?

Sorry to be all doom and gloom, but it would seem to me things are in a very precarious state.

Time to start stocking up on food and planting a vegetable patch...


John said...


I believe you're wrong with regards the 5% so I had a look and according to the Bank of England's website the requirement is:

"At present, quantitative requirements
for banks are applied through two different UK regulatory
regimes. The Sterling Stock Liquidity Regime requires major
retail banks to hold a stock of highly liquid instruments –
essentially those eligible in the Bank of England’s operations –
equivalent to five days of net wholesale outflows, plus an estimate
of retail outflows under stressed conditions. All other banks are
subject to a mismatch regime, which places limits on imbalances
between inflows and outflows of liquidity in specified time

From what you write it sounds like you could have done with a better FD...

Regards, John

Stephen Ryan said...

Things were more complicated than what BOE or the FD said or did John. In any case, those terms are always subject to change.

Rachel Elnaugh said...

John this all happened at a meeting with Barclays back in 2003 who didn't seem to argue with my FD; I agree things may have changed since then.


John said...


I don't believe it has changed, but the point is you are presenting it as a fact *now*, when it isn't. As you've critised others for spreading incorrect information I thought you might like to correct it.

Stephen, I'm sure it was more complicated.

Rachel Elnaugh said...

Mr Badger (who knows a thing or three about these matters) advises that if a bank were to run out of money (as in the case of Northern Rock or Bear Stearns) the Bank of England or Federal Reserve can step in, guarantee the debt and if necessary print more paper. It is a short term fix which has the result of devaluing the currency longer term, which is one reason why the dollar is crumbling.

All complaints about this Comment on a postcard to Mr Badger c/o Bakewell Sorting Office please...