Attacks on banks no cause for alarm

The Iraqi paper Addustour (Constitution) has reported that recent attacks on financial institutions have led some savers to withdraw cash from their bank deposits and keep it hidden at home.  At first glance, it might seem that such a trend could potentially lead to runs on the banks or even a breakdown in the payments system—events with economic consequences much more serious than the robberies and bombings that triggered the initial withdrawals.

In fact, however, there is surprisingly little to worry about.  Iraq’s banks are better able to meet depositors’ demands for cash than their counterparts almost anywhere else in the world because they do so little lending.  Over half of deposits are held as central bank reserves, which are readily available to fund withdrawals.  The absence of lending also means there is relatively little danger of a liquidity crisis.  After all, banks can’t call in loans they haven’t made.

It also seems doubtful that the attacks seen so far will have much of an effect on the aggregate level of bank deposits.  Since getting as high as 1.9 times in May, 2007, the ratio of cash in circulation to deposits has been trending steadily downward, falling below 1.0 last September and reaching a post-invasion low of 0.85 in February.  (See Chart.  Data is from the Central Bank of Iraq and Iraq Body Count.)  And while this ratio climbed sharply from October, 2006 to May, 2007, a period when Iraq’s banks were losing an average of US$ 1 million a month to robberies, it is not clear that holdups were the main reason for this switch to cash.  A more likely explanation is that the level of violence during those months simply made it too dangerous for many people to go to the bank.

As the central bank’s statistics don’t go beyond March, it remains to be seen whether there has been an uptick in the cash/deposits ratio in the last few weeks.  But it seems to me that things would have to get a lot worse before there was any real cause for alarm.

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