The bank that
made Europe tremble
On 11 May 1931, Austria's largest bank admitted a hole in its accounts. Within weeks the news crossed borders and then the Atlantic: the crisis of a small country became the crisis of Europe.
A forced merger, a hole, a run
Founded in Vienna in 1855 under the aegis of the Rothschild family, Creditanstalt accounted in 1931 for 27% of Austrian banking assets, the equivalent of 16% of the country's gross domestic product. In 1929, under government pressure, it had absorbed Boden-Credit-Anstalt, a struggling institution whose net worth was negative. To save one fragile bank, the soundest one had been weakened.
The authorities grasped the scale of the problem on 8 May 1931 and announced it on the 11th. The state, the central bank and the Rothschilds shared the rescue, and the government guaranteed the bank's liabilities. It was not enough: depositors, foreign ones above all, withdrew their funds en masse. The guarantee itself caused alarm, since it committed a considerable share of a small state's annual budget.
The mechanism is that of the bank run: a bank never keeps all its deposits in the vault, it lends them out. Once everyone judges that the others will withdraw, everyone has an interest in withdrawing first, and fear alone is enough to cause the failure it dreads. In Vienna, confidence evaporated faster than guarantees could replace it.
Contagion knows no border
Creditanstalt had creditors and holdings across central Europe. The flight of capital spread to Germany: its banks lost deposits as early as June, and the Darmstädter und Nationalbank collapsed in July 1931. In September the United Kingdom in turn abandoned the gold standard. Each link gave way because confidence in the previous one had broken.
The episode is a textbook case of systemic risk: an institution becomes "too big to be saved" by a state too small, especially when the currency is pegged to gold. It informs today's debates on the size of banks, the lender of last resort and deposit insurance, which modern systems set up in advance rather than in an emergency. A guarantee announced in the middle of a panic almost always arrives too late.
Confidence takes years to build and a few days to leave, and no late guarantee runs as fast as it does.