What the Bank Runs in Korea Mean for Traders in the Global Economy

Massive withdrawals from savings banks have been occurring over the past week in Korea. Here is an article from the Korea Times on the subject; below is an excerpt: 

A total of 490 billion won was withdrawn from 98 savings banks Monday, despite the financial regulator’s assurance that there will be no more shutdowns of such institutions.

The amount is up 60 billion won compared with Friday, when the Financial Services Commission (FSC) suspended operations of four savings banks. Regulators are looking to see whether the mass withdrawals will continue today.

The withdrawals came after the FSC confirmed that it will avoid suspending operations of additional savings banks unless in an emergency, such as a bank run.

In many ways this is simply an example of the global banking crisis we are currently in the midst of, born out of faulty loans made in a global housing crisis.

I think this is another prime example of financial contagion, something we are seeing more and more of in our global economy. I believe our global economy is deeply interconnected at this point; no event occurs in isolation, and a crisis in one part can spread to a crisis in other parts.

As for traders, I think there are a few implications:

1. For better or worse, central banks tend to respond to crises with stimulus and market interventions. As the situation in Korea intensifies, we may see central bank intervention or intervention from the IMF.

2. I believe the root problem is the need for a new global monetary agreement. If this perspective is valid, so long as these problems continue, precious metals should rally.

3. It is worth noting that Korean monetary authorities have attempted to instill confidence in the banking system, but withdrawals continue nonetheless. Distrust of the Korean government is thus at high levels. This type of a run on the banks, and the market’s lack of belief in the ability of the government in question to stabilize the economy, are historically conditions that lead to runs on a currency and the ensuing bout of rapid price inflation. For traders, there may be an opportunity in “the political dissatisfaction trade” — short currencies where political dissatisfaction is high, long currencies with a more popular political regime. Due to the contagion we’re seeing, though, I wonder if global political unrest is in the cards — and if new forms of government will emerge, perhaps in the form of new regional governments like the Eurozone, or non-state networks like Hezbollah and cyber-networks like Facebook.

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