Central banker blues

Does the National Bank of Kazakhstan have any credibility left?

In the summer of 2007, a bank run on Allianz Bank, an unusually aggressive lender, raised the curtain on a near-collapse of Kazakhstan’s banking system in the two years to come.  This week, Allianz faced another run.

In all, three commercial banks fell victim to a warning, apparently bogus, of impending bankruptcy.  It was distributed through the social networks, especially WhatsApp Messenger, reported Kapital, one of the better business weeklies in Kazakhstan.  Kaspi Bank lost a tenth of its deposits.  Almaty authorities arrested a former employee of Bank CenterCredit, said TengriNews.kz.   

An electronic rumor mill is hard to fight, due to what economists call an “information cascade.”  Here’s an example of a cascade.  Aigul, a teen, decides not to go to college.  It’s a bad decision, but her friend Boris doesn’t know that.  He knows little about the value of a degree, so just observing Aigul’s decision convinces him to skip college, too.  The two decisions persuade another friend, Gulnara, not to go either.  The chain reaction continues.  More and more people decide to forego college, so each additional person observing these choices becomes more and more persuaded that she should not go either.  Similarly, a false rumor may gain increasing credibility as it spreads through the social networks. For that matter, bank runs may also comprise a cascade.

People run on a bank because they fear that it doesn’t have their money.  The worrisome thing about a run is that they’re right.  The bank makes money by lending out yours.  Normally, this causes no problems, because the bank can satisfy today’s withdrawals with today’s new deposits.  But in a bank run, all depositors want their money at once.  To raise the cash, the bank must either call in loans early or borrow overnight.  If it calls in loans, then some corporate borrowers will go bankrupt.  This will reduce output and employment – leading, in other words, to a recession.  If instead the bank borrows overnight, then it will have to pay punitive rates of interest, weakening its balance sheet.  As a last resort, the bank can close its doors, but this very visible decision will probably prompt runs on other banks.

Running for the hills

To avert bank runs, the government insures private bank accounts.  In the last panic, in 2008, the National Bank increased the insurance to about $34,000.  The most unsettling thing about the unfolding crisis is that the insurance seems not to have diminished the runs.  People don’t trust the government – especially since the new governor of the National Bank, Kairat Kelimbetov, denied just a month ago that he would devalue the tenge.  As it turned out, his margin of error was about 20%.  (His predecessor, Gregory Marchenko, also denied that a devaluation would occur.  That was in June.)

None of this had to happen.  The National Bank could have started planning for a devaluation last summer, when it became clear that the exchange rate would exceed the Bank’s target.  In public pronouncements, it could have left the door open for an eventual weakening of the tenge.  The commercial banks could have shifted their wealth into dollars over time. 

Even now, the central bank can defuse the situation by announcing that it will increase deposit insurance and offer emergency loans to jeopardized banks at relatively low rates; and, if push comes to shove, declare a bank holiday.  The mere announcement of solid measures will soothe troubled waters.

What is the National Bank actually doing?  It’s begging people to hang on to their tenge.  This may have either of two interpretations.  One: The Bank regards the bank runs as trivial.  Two:  The National Bank can't do anything substantial about the runs, because it has lost control of the money supply (even though it probably hasn’t).  Under either interpretation, the National Bank's blitheness will only increase the runs.

The most likely denouement is that Kelimbetov will be replaced by someone with enough credibility to actually talk to the public.  Will this come in time?  –Leon Taylor tayloralmaty@gmail.com     

       

References

Gumarova, Chulpan.  50 ottenkov ‘chernovo vtornyka.’  (Fifty shades of ‘Black Tuesday.’)  Kapital.  February 20, 2014.

 

Lillis, Joanna.  Kazakhstan’s central bank urges calm amid post-devaluation bank run.  EurasiaNet.org.  February 19, 2014. 

Radio Free Europe/Radio Liberty.  Kazakh devaluation leads to bank run.  February 19, 2014.

TengriNews.kz.  Central bank governor on devaluation of the national currency, the tenge.  June 6, 2013.

TemgriNews.kz.  Kaspi Bank depositors withdraw $212 million in a bank run.  February 20, 2014.

TengriNews.kz.  Bivshy sotrudnyk Bank Tsentrcredit prechasten k SMS-atake na financovie ynstytuti.  (Former employee of Bank CenterCredit is connected to a social-network attack on financial institutions.)  February 22, 2014.