Credit turmoil `has hallmarks of bank run'

The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector, Axel Weber, president of the Bundesbank, said at the weekend.

"What we are seeing is basically what we see underlying all banking crises," said Mr Weber, one of the most influential members of the governing council of the European Central Bank.

The comments mark the first time that a top central banker has endorsed the notion that the non-bank financial system is seeing an old-style bank run.

Some Federal Reserve policymakers also privately see comparisons between the current distress in credit markets and the bank runs of the 19th century, in which savers lost confidence in banks and demanded their money back, creating a spiralling liquidity crisis for institutions that had invested this money in longer-term assets.

That scenario ultimately led to the creation of the US Federal Reserve and other central banks as lenders of last resort for the banking system.

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Mr Weber's analysis highlights the dilemma facing central banks, which cannot channel funds directly to the non-bank financial sector, and may therefore have to resort to easing monetary policy instead. The ECB is due to set its key interest rate on Thursday and the Federal Reserve on September 18.

Mr Weber told fellow central bankers and economists at the Federal Reserve's Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks.

Surprise, surprise... problems come from the unregulated bits of the market. And resemble problems from last century, before we had regulation - that was put in palce because of devastating financial crises.

It's back to the future, again...

In the long run, we're all dead. John Maynard Keynes