Undercover Economist

Some notes on a cash crisis

Joy for some customers of Australia’s Commonwealth Bank recently, as rogue cash machines began dispensing munificent sums, thanks to a software problem. Given the amount of money the western world has flung at its banks over the past three years, it makes a nice change when the banks fling some back.

The cash machine escapade has already led to the conviction of one rather reckless teenager, who reportedly took out AS$1,500 and high-fived a friend while police were watching. It also reminded me of the reverse scenario being discussed at the height of the financial crisis: what would happen if a bank had to shut down its cash machines?

“I don’t think I’d want to be in a society where people couldn’t get their hands on their money,” says Paul Smee, the chief executive of the UK’s Payments Council – and thus one of the people in charge of making sure that doesn’t happen. I recently spoke to Smee and to Edwin Latter, director of the Link cash machine network, to weigh up the risks.

Naturally, both men were keen to convey a sense that they are ever vigilant and that the cash machine network is safe. Cash machines can fail for technical reasons, and occasionally they do, but there is plenty of redundancy in the system. If Link failed, for example, customers would still be able to withdraw cash if they seek out their own bank’s machines. They would also be able to use credit cards and get cash from shop tills, which operate on different networks. The system used to deposit salaries in bank accounts, Bacs, is on yet another network. In the unlikely event of a sustained failure of one of these systems, there seem to be plenty of alternative ways to prevent the collapse of society.

In short, the weakest Link in the cash machine networks is one few people imagined until 2007: the banks themselves. If a bank fails and is not rescued either by a competitor or by the government then its customers will find themselves cast adrift, explains Latter: “the [cash machine] operators would say, ‘we’re no longer dispensing cash to your customers’.”

The terrifying prospect is that your cash cards would be refused, not because you were out of cash but because your bank was. No wonder governments stepped in to rescue banks. The hope is that they are now acquiring the legal and organisational tools which, in some future crisis, would allow them to rescue customers without necessarily rescuing the banks.

While Northern Rock and Lehman Brothers are the most obvious symbols of the crisis, its first symptom was a sudden jump in the rate at which banks were willing to lend money to each other. But Latter points out that even if the interbank lending market dried up completely, so that banks were utterly unwilling to lend to each other – he calls this a “very apocalyptic scenario” – the cash machine network is small enough that it could continue unaffected, at least for a while.

In the UK there are 100 million bank cards, typically with a £250 daily limit, so if we were truly panicked, we could collectively withdraw £25bn per day, which is 50 times the usual total. It might give the armoured car companies something to worry about as they tried to top up 63,000 cash machines, but even £25bn is a smaller sum than one might think. The interbank network Chaps typically carries £300bn per day, 600 times as much as is usually withdrawn from cash points. “You could add up every note in every ATM in the UK,” says Latter, “and it wouldn’t come close to the sums in the interbank markets.”

Latter adds that at no stage in the crisis was there the slightest indication that we were collectively withdrawing more cash than usual. The economists, it seems, were more alarmed than the public.

Also published at ft.com.