Glitch shows us what euro collapse could do

The recent difficulty in Ulster Bank’s electronic payment systems has exposed how fragile our banking system is to any shock.

And how uncertain life can be when there is any doubt about the ‘plumbing’ of our financial system.

We don’t expect our direct debits to fail, any more than we expect our showers to start leaking. When they do, life quickly becomes intolerable. Or at the very least things smell worse. We depend entirely on our banking system to make modern life work. Efficient banking is the backbone of a credit-based monetary economy. This is why the banks are systemically important: without them the system doesn’t work.

The shaking apart of one piece of the financial system’s plumbing has got me thinking, and has worried me:

What if we’re looking at a preview of a financial meltdown following a breakup of the euro?

I was one of those affected by the payment system breakdown. Like an estimated 100,000 people in Irish society, I could almost hear the direct debits for creches, car loans and savings pinging faintly in the background when payday arrived.

Ulster Bank’s problems brought home to me just how much I take my online banking for granted, and it got me thinking about what we might expect in any breakup scenario of the eurozone, where the banking system would be the canary in the mineshaft of an economic collapse.

Think about this for a second. Ulster Bank’s customers are sure that their money is safe, there is no chance of the bank collapsing, yet customers who have experienced delays in receiving their salaries or social welfare benefits have to go to branches of the bank where they can withdraw money if they produce pay slips and identification.

Cash can also be taken out on credit cards, apparently interest-free. The knock-on effects will be a loss of confidence in the banking system as a whole by these customers.

There will be further ramifications. The governor of the Bank of England, Mervyn King, has called for an inquiry into what went wrong.

Our own Central Bank is urging other private banks to re-examine their contingency plans for events like this happening in banks like AIB or Bank of Ireland.

At the very least we are going to see a clampdown on the types of infrastructures used to help make these payment systems work.

It isn’t the first time Ireland has had issues with its banking system. In 1970, Ireland’s banks went on strike. All of them. The average person had no idea how long they would be without banking services, so the level of uncertainty was high. In the end the strike lasted almost seven months.

People had to get by without regular banking, and in fact they lost access to between 82pc and 86pc of the supply of money in the economy.

The economy was severely disrupted in much the same fashion as the Ulster Bank disruption today, but a version of normality asserted itself rather quickly, because people were able to use cheques for payment of goods and services. These cheques carried a large risk of default, but people got on with it.

The episode makes a clear distinction between money as a means of payment, hard cash, and money as a means of exchange — cheques and a bit of trust.

I’m not sure how this would work in modern Ireland. The author of the classic study on this episode, Professor Antoin Murphy of Trinity College Dublin noted in an article in 1978 that Ireland’s relatively small size and tight social networks allowed for the trust-based, cheque-based system to flourish.

In the event of a euro breakup or a large-scale banking collapse, most likely another form of payment would assert itself quickly, but the immediate disruption to economic activity would be enormous. No access to deposits, no surety of payment, either from your accounts or to them, and all for an extended time.

In this sense, the Ulster Bank episode is a tiny aperitif of what might await us should the eurozone begin to break up. As one of those caught up in the whole mess, it gave me pause for thought. Here we have a relatively minor upset within one bank that is upsetting the banking system across the country. Imagine this situation happening across all the banks for an extended period of time — the authorities must work to ensure this disruption is avoided, if it can be avoided.

Published in the Irish Independent

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