Online bank runs deepen financial sector’s problems

The widespread use of online banking services is putting banks under threat of silent runs on banks.

Customers removing cash from troubled banks...

The widespread use of online banking services is putting banks under threat of silent runs on banks.

Customers removing cash from troubled banks leaves no clear signs that money is being withdrawn, according to a report from Reuters.

The warning comes as consumers have been moving money between banks to reduce the risk of losses if banks run into trouble.

But online banking has raised the prospect of a cyber-version of the run on Northern Rock last year. Then images of people queuing outside the bank to withdraw their life savings hit the deadlines, sparking financial panic.

With about five million online banking users in the UK, according to Towergroup, consumers can move millions of pounds at the click of a button.

But Bob McDowall, analyst at Towergroup, warned that online banking systems are not designed for high volumes of transactions and would probably crash if there was a run.

"This is an alternative to queuing up to take your money out the bank but these systems were not built for the level of transactions that a run on a bank would involve."

Northern Rock's website crashed at the height of its troubles because of the high number of customers accessing it. The bank said in a message to customers at the time that its website, "has been running very slowly due to the number of people working online."

Under current arrangements, if a bank goes bankrupt £50,000 of customers' money is guaranteed through the Financial Services Compensation Scheme, in the UK.

This was recently increased from £35,000 in an attempt to reassure customers and reduce the turmoil in the financial services sector, which is exacerbated by customers withdrawing money.

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