During the mid-1970s, while
working as a very junior banker in the City of London, I was an eyewitness to a
bank run. It was not a pretty sight. Small savers in particular were desperate not
to lose their life savings. And the desperation showed.
The run was a small part of a rash
of bank failures that were taking place across Europe, among them the German
Herstatt Bank, as well as London and County Securities in the UK. Apart from
facing down angry clients, banks immediately pulled back from lending funds on
the overnight market, for fear that they might not be repaid. This behavior
only compounded an already difficult situation. (Ironically, one bank all we were ready
to deal with was Moscow Narodny; everyone figured the Soviets would never let
their bank go under.)
Afghanistan's largest bank, Kabul Bank, is now in the midst of fending off a
run on its deposit accounts. As was the case those many years ago in Europe, it
is the small depositors who are the most angry, vociferous, and panicked. Big
depositors are bailing out as well. Somewhere between $180 million and $300
million have been withdrawn, and the bank has only some $250 million left in
liquid funds.
Like so many other institutions in Afghanistan, Kabul Bank is both politically
well connected and the subject of rumors about corruption. Moreover, the news
that Khalilullah Frozi, one the two largest Kabul Bank shareholders, was
recently ousted as CEO because of purported corruption by the bank's
leadership, does not help matters at all. That one of President Karzai's
brothers, Mahmoud Karzai, is the bank's third largest shareholder -- and that
the bank manages the government's payroll -- provides particular ammunition for
Karzai's enemies. Finally, because a bank run is not a rational affair -- depositors
panic when they read of other depositors withdrawing funds creating the human equivalent of a cattle stampede -- it matters little whether
the rumors of corruption are true or not.
The United States has rushed a small number of experts to Kabul to provide
technical assistance to the bank and reassure depositors. Mahmoud Karzai wants
more than just technical assistance, however. He is calling for American financial
assistance to cover all depositors. Since the bank has assets of only about
$1.3 billion, it is not a large sum relative to what the United States pours
into Afghanistan on a monthly basis. The money is not really the issue,
however.
The United States has still not pulled out of its own recession, and unemployment
remains high. There is continuing resentment of the administration's various
bailouts, with anger directed at Wall Street in particular. In these
circumstances, bailing out a foreign bank whose leaders are being accused
(whether rightly or wrongly) of corruption is a highly risky undertaking. It
does not help that Kabul Bank has acknowledged that it made some large and risky
investments in Dubai villas for rich Afghans. These investments turned to dust
when the real estate bubble in the Gulf state burst wide open in 2008. Moreover,
American taxpayers could legitimately ask why Afghans are rushing to pull out
their money, and where those funds are being deposited. Are they back in Dubai?
In Switzerland? In the Cayman Islands? Or have they been retained in Afghanistan
-- as they should be -- and recycled into the eight other, smaller, Afghan
banks? And will Kabul Bank continue to manage the government's payroll? Or will
that lucrative business be transferred to another Afghan Bank?
It is critical that Washington continue to assist with the restructuring of the
Afghan banking system in general, and with sorting out Kabul Bank's problems in
particular. A healthy banking system is critical to the strength of the Afghan
economy, which in turn is a necessary condition for winning the war against the
Taliban and other insurgents that plague the country.
Nevertheless, before any American money is funneled into the Afghan banking
system, that system needs to be completely overhauled. Too much money has been
alleged to have seeped out of the country to foreign bank accounts. It is
therefore critical that the banking system be a model of financial probity.
Until now, bank regulation clearly has not been all that it should be, and that must
change immediately. In addition, there should be a loosening of the nexus
between private ownership of the banks and the government. The tight links
between the two sectors seem to have hurt both parties. Only if those
conditions begin to be met should American taxpayers' funds be used to prop up
Kabul Bank -- but by then, Kabul Bank will have become a very different kind of
bank.
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