What is a Bank Run?
A bank run happens when many customers of a bank withdraw their deposits simultaneously due to fears of the bank’s potential insolvency. As more people pull their funds, the likelihood of the bank defaulting increases, prompting even more withdrawals. This cycle can lead to the bank’s inability to fulfill withdrawal requests if reserves fall short.
Key Highlights
- Simultaneous Withdrawals: Large groups of customers withdrawing money together trigger a bank run.
- Fueled by Fear: Customers often withdraw savings due to panic over the bank’s solvency.
- Cash Reserves Depleted: Increased withdrawals strain the bank’s cash reserves, potentially leading to default.
- Historic Events: Notable bank runs include those during the Great Depression and the 2008 financial crisis.
- FDIC Insurance: Established in 1933, the FDIC reduces the risk of bank runs by insuring deposits.
How Bank Runs Work
Bank runs arise when many individuals withdraw their money out of fear that the institution will become insolvent. Traditionally a result of panic, these runs can actually propel the bank towards bankruptcy.
Banks generally maintain limited cash reserves daily, based on operational needs and security. To offset risks tied to bank runs, banks also store reserves with the central bank, which pays interest on these deposits to incentivize judicious reserve management.
However, as most of a bank’s deposits are not kept as immediate cash, banks must swiftly increase their on-hand cash to address mass withdrawals. This often means selling assets at below-market prices, causing losses and further unsettling clients, potentially triggering more withdrawals.
Examples of Bank Runs
Silicon Valley Bank
In March 2023, Silicon Valley Bank collapsed due to a bank run initiated by venture capitalists, which saw customers withdraw $42 billion in just a day. By the following business day, regulatory authorities closed the bank and assumed control of its assets. At the time, the bank had last reported $209 billion in assets.
Washington Mutual (WaMu)
Washington Mutual collapsed in 2008 with $310 billion in assets, marking the largest bank failure in the U.S. A combination of a poor housing market and rapid expansion, coupled with a run induced by $16.7 billion in withdrawals within two weeks, led to its demise. JPMorgan Chase acquired Washington Mutual for $1.9 billion.
Wachovia Bank
Facing $15 billion in withdrawals over a two-week post-loss earnings period, Wachovia eventually shuttered and was acquired by Wells Fargo for $15 billion. Withdrawals mostly came from commercial accounts beyond the limits insured by the FDIC.
Preventing Bank Runs
Following the destabilization of the 1930s, governments initiated measures to reduce future risks of bank runs. A significant step was the creation of reserve requirements, initially ensuring banks held a percentage of deposits as immediate cash and later replaced by sophisticated monetary policies.
In 1933, the FDIC was created to secure bank deposits, fostering public confidence in the financial system by insuring each depositor for up to $250,000 per ownership category. In isolated events like the 2023 Silicon Valley Bank failure, the FDIC fully reimbursed depositors using the Deposit Insurance Fund, populated by bank assessments.
In severe scenarios, banks might close temporarily to prevent mass withdrawals. President Franklin D. Roosevelt’s 1933 bank holiday exemplified this approach, where inspections guaranteed banks’ solvency before resuming operations.
What is a Silent Bank Run?
A silent bank run unfolds when depositors electronically withdraw funds in large volume without physically entering the bank, characterized by ACH or wire transfers which drain financial reserves unseen.
What is Meant by a Run on the Bank?
A run on the bank occurs when panic-stricken people try to simultaneously withdraw all their deposits, leading to a bank’s cash reserves depletion and possible insolvency.
Why is a Bank Run Bad?
A bank run can destabilize banks, prompting financial crises. Given a bank’s limited cash-only reserves, mass reporting demands can outstrip their liquidity, causing failures to return every depositor’s money.
The Bottom Line
Bank runs reflect customer panic, either physical or online, resulting in mass withdrawals that can, in extreme scenarios, cause the closure of banks, as seen in Silicon Valley Bank’s 2023 collapse. To mitigate risks, it is advisable to keep deposits under the FDIC-insured limit while considering diversified bank accounts for higher deposits.
Related Terms: insolvency, FDIC, reserve requirements, asset-backed securities.
References
- Cornell University. “Bank-Runs, Information Cascades, and the Great Depression”.
- Board of Governors of the Federal Reserve System. “Interest on Reserve Balances”.
- St. Louis Federal Reserve. “How Much Do Banks Keep in the Vault?”
- Social Security Administration. “The Depression”.
- Federal Reserve Bank of St. Louis. “Understanding the Speed and Size of Bank Runs in Historical Comparison”.
- Silicon Valley Bank. “SVB Financial Group Announces Proposed Offerings of Common Stock”.
- Department of Financial Protection and Innovation. “Order Taking Possession of Property and Business”.
- Federal Deposit Insurance Corporation. “FDIC Creates National Deposit Bank of Santa Clara”.
- Office of Thrift Supervision. “OTS Fact Sheet on Washington Mutual”.
- JPMorgan Chase. “JPMorgan Acquires Washington Mutual’s Banking Operations”.
- Board of Governors of the Federal Reserve System. “The Acquisition of Wachovia Corporation by Wells Fargo & Company”.
- CATO Institute. “Run, Run, Run: Was the Financial Crisis Panic over Institution Runs Justified?”
- Brooking Institution. “History Credits Lehman Brothers Collapse for 2008 Financial Crisis”.
- National Bureau of Economic Research. “The Fed and Lehman Brothers”,
- Federal Reserve. “Reserve Requirements: History, Current Practice, and Potential Reform”. Page 574.
- Federal Reserve. “Policy Tools (Reserve Requirements)”.
- Federal Deposit Insurance Corporation. “The First Fifty Years”.
- Federal Deposit Insurance Corporation. “Your Insured Deposits”.
- Federal Deposit Insurance Corporation. “FDIC Acts to Protect All Depositors of the former Silicon Valley Bank, Santa Clara, California”.
- Federal Deposit Insurance Corporation. “The Deposit Insurance Fund”.
- Federal Reserve Bank of New York. “Why Did FDR’s Bank Holiday Succeed?”
