Europe Banks Fear a Flight

The specter of funding problems is once again haunting Europe's banks. Even after the European Central Bank pumped more than €1 trillion ($1.278 trillion) of cheap three-year loans into hundreds of banks, the Continent's financial system remains vulnerable to the prospect that stampedes of customers could yank their deposits from institutions perceived as shaky, The Wall Street Journal reported. That threat was shoved into the spotlight last week when customers withdrew more than €700 million from Greek banks in a single day. The deposit flight, in response to the rising odds that Greece will leave the euro zone, represented a dramatic escalation of two years of a slow but steady flow of deposits fleeing the country's crippled banking system. Now the concern among a growing number of policy makers, investors and analysts is that banking systems elsewhere in Europe's periphery are susceptible to similar crises. If that happens, policy makers and central bankers would likely again have to rush to the rescue. If Greece leaves the euro zone, it will almost certainly restrict bank customers from moving their money out of the country. That could prompt depositors in struggling countries like Spain and Portugal to think, "If it could happen in Greece, it could happen here," said Philippe Bodereau, head of European credit research at bond-fund manager Pimco. They then might preemptively transfer their funds out of their countries in order to avoid having their savings converted into rapidly devalued Spanish pesetas and Portuguese escudos. "That's what markets are starting to worry about," Mr. Bodereau said. "It takes you to a whole different level of liquidity crisis." Read more. (Subscription required.)