Europe fails to learn the lessons of history on calming creditors

SHADOW banking panics are nothing new. Amsterdam experienced a pretty severe one in 1763. The collapse of the banking house Gebroeders de Neufville sparked a financial crisis that year not because depositors scrambled to recover their cash, but because creditors did.

History repeated when Bear Stearns and Lehman Brothers failed in 2008, and the same, in somewhat less acute form, has broken out across Europe today.

Generally speaking, the fix for classic, depositor-sparked bank runs was the introduction of deposit insurance. This, of course, only works when the guarantee of the insurer is sound, as Greece and Spain are now realising.

But the real issue today is that the global financial system, particularly in the last three decades, evolved away from a depositor-funded one towards a creditor-funded one without any such insurance in place. Banks once again became vulnerable to a sudden loss of confidence; it was only a matter of time before an event like the panic of 2007-08 took place.

How, then, to deal with creditor panics? The Bank of Amsterdam, acting as a central bank, successfully mitigated a larger crisis in 1763 by broadening the collateral it accepted from merchant banks to include silver bullion and injecting liquidity into the banking system in the form of trade coins. Central banks globally responded in almost exactly the same way in 2008.

And yet the ECB, which just announced it will stop accepting collateral from Greek banks, seems to be ignoring these lessons today.

Frankfurt’s reluctance to act isn’t surprising. The politics of the Eurozone crisis, which is both financial and existential, are fraught. And it is easier to justify the rescue of individual depositors in a banking panic than creditor institutions; the former are always cast as its victims, the latter more often its villains. However, supporting creditor institutions is just as important to the stability of the financial system today as protection for ordinary depositors. Either financial stability and support for these institutions, or neither. Regulators cannot have it both ways.

Kelly Evans is a CNBC anchor.

Follow her on Twitter: @Kelly_Evans