Recently hundreds of ethnic Chinese depositors rushed to withdraw their money from Abacus Federal Savings Bank in New York's Chinatown and from its branch in Philadelphia, sparked by fears of the thrift's insolvency.
This is deja vu, because 17 years ago, as a lawyer in private practice, I represented a client that was acquiring what was then the largest minority bank in the United States - and was also failing. Together with the Office of Thrift Supervision (then the Federal Home Loan Bank Board, and its sister agency, the FSLIC), we successfully prevented a similar run on the bank in San Francisco's Chinatown and elsewhere in California.
At Abacus, news reports reaching the Chinese community stated that a former branch manager had been fired for allegedly embezzling money. The bank posted notices that the individual was being investigated for involvement in account irregularities, and the run began. It was stemmed only after substantial withdrawals took place and cash was rushed in to meet liquidity needs.
In 1986 federal regulators were highly concerned about problems at United Bank in the Bay Area. A sale was arranged in which our firm's client, a San Francisco commercial bank owned by investors in Asia, agreed to buy the bank once the government took over. The biggest concern to our clients and the regulators was whether the "new" bank would be subject to runs by its depositors.
We were told that a significant portion of the depositors were recent arrivals from China who spoke no English, knew nothing about federal deposit insurance, and often preferred to keep their money out of banks. Unless the transition between the disappearing bank and the surviving one was seamless, the institution and its depositors could suffer.
Anticipating this, public relations experts were brought in from Hong Kong, and ads in various Chinese dialects were prepared for publication in local newspapers. Fortunately, our clients were very sophisticated and fully understood the risks and the tasks before us.
Teams of federal regulators and the new bank's executives were assembled, and their actions were rehearsed again and again so that everyone knew their roles. Right before the takeover at the close of business on a Friday, we met across the street from the bank's headquarters and waited until its customers had left the premises. The same thing happened at each branch. Then our team entered the bank, and it reopened Monday morning as the new bank, unencumbered by the problems of the past. No runs occurred.
Fast-forward to Abacus, where it appears that much has gone wrong. When notices were slapped on its doors apprising depositors of problems, the rumor mill went into overdrive, and chaos ensued. All of this should have been avoided.
Trust is a very fragile commodity, particularly among those who do not appreciate the safeguards built into our financial system. The problems at Abacus are a sobering reminder in this high-tech age that people's fears, well-founded or not, can induce panic, and the well-being of our financial institutions can't be taken for granted.
What mistakes were made at Abacus, and what are the lessons?
First, it must be recognized that many of its depositors may have been jittery already about SARS. Indeed, many in line at Abacus wore masks. Second, any "official" notice is often met with suspicion and apprehension, and that is doubly true where the safety of one's deposits is concerned. Rumors of insolvency were met at Abacus by panic as depositors worried that the thrift would collapse and their deposits would vanish.
Even though Abacus' president attempted to assure depositors that all was well, many of them speak only Fujianese, a dialect used in the south of China, while Abacus' officials speak Cantonese or Mandarin. A failure to communicate compounds fear and confusion, which in turn gives rise to panic.
Abacus is a small financial institution, and some may argue that language and cultural issues alone drove the panic. But there have been other panics where language was not an issue. Abacus may represent a microcosm of what can happen elsewhere in the United States unless we remain vigilant. Future panics may not be so easily quelled.
