How to Start a Bank Run

Canadian Prime Minister Justin Trudeau is going down a very dangerous path with his threat to freeze the bank accounts of protesters. What he doesn't seem to understand is that the banking system of the western world relies on trust. There are no vaults of gold bars to back our currencies. We deposit our money in the bank because we trust that we will be able to get it back out as and when we need it. When that trust evaporates we get what's known as a run on the bank. In the past that has always happened because trust in the particular bank has failed, as in the run on Northern Rock. Investors in that institution started to get worried that their deposits were not secure and so they queued round the block to get them out. Banks never have enough ready cash to pay out in that situation and so the UK Government had to step in. Otherwise Northern Rock would have gone under, taking people's deposits with it.

Now we have a situation in Canada where a politician is threatening to deny people access to their money. If banks comply with orders to freeze accounts it will have the same effect of damaging trust in the banks, even although the banks are not failing. People, not just in Canada but around the world, will look at what's going on and will start to wonder if they would be better withdrawing at least some of their cash from whichever bank it happens to be deposited with, just in case one day their account is frozen. They may not be planning to protest or do anything else which might merit Trudeau's negative attentions but the seed of doubt has been sown: maybe my money is not as safe as I thought it was. Who knows what the trigger for future invocations of emergency powers might be? They are only supposed to be invoked in extreme situations in Canada but Trudeau is driving a truck through that. More trust destroyed.

In the case of Northern Rock, UK politicians stepped in to save depositors' money (at the expense of shareholders) by nationalising the failing bank. Canada's leader is risking causing a run on healthy Canadian banks by his draconian actions. He may not care if Canadians lose their trust in him but if they lose their trust in the banking system it won't just be him who pays the price.