RUNS ON BANKS TODAY—COUNTERPARTIES, NOT DEPOSITORS.

RUNS ON BANKS TODAY—COUNTERPARTIES, NOT DEPOSITORS. I have posted several times (including here and here) about the risk that a bank or other institution faces whenever it borrows short and lends (or invests) long. With deposit banks, before the FDIC under Franklin Roosevelt guaranteed deposits up to an amount that is large for an individual, runs were frequent and took the form of depositors rushing to withdraw money while there was still some left. We don’t see that kind of run very much any more. The most recent institutional failure, the 7th or 8th largest bankruptcy ever in the US, was MF Global, and it took the form of prospective lenders becoming afraid to enter into transactions with—to lend short to—MF Global. The Zero Hedge Blog has several posts explaining—-and, importantly,—predicting this kind of event. Here is one of the posts, by Reggie Middleton, which says (emphasis in original): “This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties.” Middleton quotes the Financial Times website to the effect that although the failure of MF Global has been characterized as the result of a bad bet on Italian and Spanish bonds, those bonds had not lost much value. The problem was the lack of enough liquidity to withstand the run by counterparties.