Bank Run on Deposits History and Lessons Learned

Bank runs on deposits have been a recurring phenomenon throughout history, with significant consequences for both depositors and banks. The first recorded bank run occurred in 1797 in England.

In 1907, a bank run in New York City led to a brief national bank holiday, as depositors rushed to withdraw their funds from banks. This event highlighted the interconnectedness of the financial system.

The 1930s saw the Great Depression, which was exacerbated by a wave of bank failures and subsequent bank runs. In the United States, over 9,000 banks failed between 1929 and 1933, resulting in massive losses for depositors.

The 2008 global financial crisis led to a large-scale bank run on deposits, as investors and depositors lost confidence in the banking system.

The history of bank runs dates back to the 19th century with the Panic of 1873, a global economic downturn that started in Europe and spread to the United States.

One of the earliest recorded bank runs occurred in 1825 in England, where a bank called the City of Glasgow Bank failed due to a combination of reckless lending and poor management.

The first bank run in the United States was in 1861, during the Civil War, when depositors withdrew their funds from banks in the South due to the war's uncertainty.

Bank runs continued throughout the 19th and early 20th centuries, with the most notable being the Panic of 1907, which was caused by a combination of bank failures and a stock market crash.

In the United States, the Federal Reserve was established in 1913 to regulate the banking system and prevent bank runs from occurring.

The Glass-Steagall Act of 1933 was passed to separate commercial and investment banking, which helped to stabilize the banking system and reduce the likelihood of bank runs.

The 1970s saw a significant increase in bank runs, particularly in the United States, due to high inflation and interest rates.

The most recent bank run occurred in 2008, during the global financial crisis, when depositors withdrew their funds from banks in the United States and Europe due to concerns about the banks' solvency.

The FDIC, which was established in 1933, has helped to prevent bank runs by insuring deposits up to $250,000 and providing depositors with confidence in the banking system.

The Federal Deposit Insurance Corporation (FDIC) was established by Congress to assure consumers about the safety of their funds and stabilize the economy. This has significantly reduced the occurrence of bank runs in the United States.

Because of insured backing by the FDIC, customers are generally aware of the protection and are less likely to withdraw their funds unnecessarily. Yet, some consumers may still opt to remove their funds due to mistrust in the system.

Most banks do not hold the entirety of their customer deposits on-site, only a relatively small proportion can be physically kept within the bank due to federal regulations.

Bank runs can be devastating for the economy, but there are measures in place to mitigate the damage.

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to protect customers when banks fail. The FDIC guarantees up to $250,000 per depositor, per FDIC-insured bank, per ownership category, making it unlikely for depositors to lose their money.

In a situation where a banking institution faces the threat of insolvency due to a bank run, it may use techniques such as acquiring a vulnerable bank by a bank with high capital reserves to backstop it. This helps to stabilize the bank and prevent further withdrawals.

The FDIC can also facilitate a resolution by seizing the vulnerable bank and conducting an auction of its assets to raise funds to return to depositors. This process is less desirable, but it ensures that depositors receive their insured amount.

Regulators require banks to hold a specified amount of capital relative to their assets on their balance sheet, measured using capital adequacy ratios. If a bank fails to meet these ratios, it may become subject to regulatory actions that could lead to its closure.

A bank's liquidity coverage ratio (LCR) is a metric used to assess its likelihood of surviving a liquidity crisis. While the LCR applies to larger banking organizations, smaller liquidity ratios such as the loan-to-deposit ratio (LDR) can also be used to evaluate a bank's liquidity position.

External factors like rising interest rates or a global pandemic can expose or exacerbate vulnerabilities in a bank's financial condition, making it more susceptible to a bank run.

Term deposits can be a game-changer for banks looking to prevent bank runs.

By incentivizing customers to use non-callable term deposits, banks can earn a higher percentage of interest on the money. This is a win-win for both parties.

These deposits effectively lock up a bank's liabilities, allowing it to survive a bank run even if customers withdraw other deposits.

In return for the higher interest rate, customers can only withdraw their money after the agreed period, not on demand, making it a more secure option for the bank.

Banks may borrow money from other banks or the central bank to prevent bankruptcy.

The Central Bank is known as the lender of last resort, responsible for safeguarding the soundness of financial institutions by loaning out money to struggling banks.

In 2023, the Federal Reserve announced a new program to backstop institutions requiring liquidity, the Bank Term Funding Program (BTFP).

The US Department of the Treasury guarantees the Federal Reserve for up to $25 billion under this program.

Using the 2022 capital ratio of approximately 12x, the program translates to a potential coverage of approximately $300 billion in deposits.

Bank runs are often fueled by panic rather than the bank being insolvent, but people withdrawing their funds en masse can still contribute to the bank's liabilities becoming greater than its assets, potentially leading to collapse.

A government agency called the Federal Deposit Insurance Corporation (FDIC) was created in 1933 to help reduce the likelihood of bank runs. The FDIC guarantees that money is safe by insuring up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

The FDIC has protected depositors from losing a penny since its establishment, but bank runs still occur from time to time.

Banks can fail in various ways, but the most common cause is insolvency, where a bank can no longer meet its obligations. Regulators then intervene in a process called receivership, which can involve the FDIC negotiating a sale to another bank or liquidating the bank's assets to repay creditors.

The loss of confidence in the banking system is the root cause of most bank runs. This can stem from rumors or baseless claims suggesting a bank might face a financial shortfall.

Economic downturns or recessionary fears can often precede bank runs, as external factors like rising interest rates, banks incurring losses, high inflation, and a weak economic outlook contribute to widespread concerns.

If a bank is facing issues with liquidity, word can quickly spread and cause rumors that the bank could soon be insolvent, leading to a bank run.

Negative press coverage can often be the nail in the coffin that precipitates a bank run, as the general public becomes aware of the risk and rushes to withdraw their deposits and savings.

Here are some key factors that can contribute to a bank run:

The most recent high-profile bank run in the United States was the one that led to the failure of Silicon Valley Bank.

Silicon Valley Bank had an unusually high percentage of uninsured deposits due to its abundance of large accounts. This made it vulnerable to a bank run when major venture capital firms urged startups to pull their money out of the bank.

Over $42 billion was pulled out of Silicon Valley Bank in a single day, leading the FDIC to shut it down. The bank had sold $21 billion in Treasury bonds, resulting in a $1.8 billion loss, which triggered the bank run.

The most significant bank run in the United States was the one that led to the failure of Silicon Valley Bank, resulting in a $42 billion withdrawal in a single day.

The bank's announcement of a $1.8 billion loss due to selling Treasury bonds led to a massive withdrawal of deposits, causing the FDIC to shut it down.

In 1930, the failure of the Bank of United States was triggered by a run on deposits, described as the bank run that helped create the Great Depression.

This event led to a series of crises among commercial banks, turning the recession into the Great Depression.

The failure of Silicon Valley Bank in 2023 was the second-largest bank failure in U.S. history, with a negative balance of $958 million after customers withdrew $42 million.

The FDIC covered all of the deposits, and a temporary bridge bank was created, which was later acquired by First Citizens Bank.

The bank run in Russia following the invasion of Ukraine by Russia was a unique case, where the concern was directed at the government rather than the banking system.

Lines at ATMs snaked down sidewalks and around buildings in Moscow and at Russian banks in Europe as depositors rushed to withdraw cash.

The failure of New York-based Bank of United States in 1930 was triggered by a run on deposits, which has been described as the bank run that helped create the Great Depression.

In all, a series of crises among commercial banks turned the recession at that time into the Great Depression.

The U.S. Treasury Secretary announced that all depositors of Silicon Valley Bank would be guaranteed the full amount of their deposits.

This echoes other episodes through times of economic uncertainty, such as the extraordinary measures taken to cover all bank deposits and money-market funds during the 2008 financial crisis.

The 1929 stock market crash was a catastrophic event in economic history that left a lasting impact on the financial system. It was a time of rampant speculation by deposit-taking banks in the stock market.

Many banks were using deposits to fund bets in stocks, which led to widespread banking panics and hundreds of bank failures. This was a result of the speculative bubble bursting.

To rebuild trust in the system, Congress introduced deposit insurance to protect bank deposits. This was a crucial move to prevent further bank runs and failures.

The Federal Deposit Insurance Corporation (FDIC) was born during this time, with the goal of protecting bank deposits and stabilizing the financial system. The FDIC has since become a vital institution in maintaining financial stability.

Congress also required banks to fully separate commercial banking activities and investment banking activities. This was done to protect deposit-taking functions of banks from riskier investment-banking activities.

Loan concentrations played a significant role in the 2008 financial crisis. Easy access to credit and loose lending standards led to a housing bubble.

Loose lending standards resulted in increasing concentrations in real-estate loans. This was a major contributor to the crisis.

Hundreds of banks failed, including Lehman Brothers and Bear Stearns. These banks were deeply involved in the precarious mortgage loans of the time.

A confidence crisis ensued, with investors selling off their shares and clients rushing to withdraw their money. This further exacerbated the crisis.

In response to the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. This law aimed to increase transparency and oversight in the banking industry.

Basel III capital requirements were also introduced to mitigate bank risk internationally. This included requiring banks to increase their capital and maintain certain liquidity coverage ratios.

A bank run can be a major destabilizing force, especially in a fractional-reserve banking system where banks only keep a small portion of their assets in cash.

The FDIC, a government agency, was created in 1933 to protect customers when banks fail, and it guarantees up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Bank runs can cause a bank to collapse that wouldn't have otherwise, as the bank's financial condition weakens when customers start to panic and withdraw deposits.

In the United States, bank runs are not typically caused by bank failures, but rather by public fear pushing a bank into insufficient liquidity.

If a bank can't maintain a regulatory equity requirement, a bank run can push it into bankruptcy, and a complete shutdown is a drastic measure taken in consultation with regulators.

Banks may limit withdrawals per customer or suspend all withdrawals altogether as a way of dealing with the panic, but this is not always possible or preferable.

The US president declared a national shutdown, or bank holiday, in 1933 to allow banks to access cash from other banks or the central bank and ensure withdrawal requests were honored after they reopened.

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to assure consumers about the safety of their funds and stabilize the economy.

Bank runs can be prevented by having insured backing from the FDIC, which is why such events are now uncommon in the United States.

Certain consumers may still opt to remove their funds from banks due to mistrust in the system, but the risk of a potential occurrence is never completely out of the picture.

Most banks do not hold the entirety of their customer deposits on-site, only a relatively small proportion of total customer deposits can be physically kept within the bank because of federal regulations.

In the event of a bank failure, the FDIC negotiates a sale to another bank or liquidates the assets of the bank to repay the residual creditors.

To recover from bank runs, the government can take measures such as declaring a national bank holiday to allow for federal inspection of banks and developing new banking legislation to help ailing financial institutions.

Bank runs can be a major concern for both banks and their customers. A bank's assets and liabilities must be managed carefully to avoid trouble.

A bank's assets can include loans and investments, but if it loses too much on these, it can spell trouble. This can be caused by bad credit and underwriting practices, poor financial decision-making, and faulty forecasting, among other things.

The track record of a bank's management team is crucial to understanding its stability. Asking questions like whether they have experience in banking, and whether they're engaging in prudent risk management, can help.

A build-up in significant concentrations, low-quality loans, unhealthy loan-to-deposit ratios, and ignoring direction from regulators are all examples of poor management. This can lead to a bank's liabilities becoming greater than its assets, which can result in collapse.

The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category, which can help protect customers in the event of a bank failure. However, bank runs still happen from time to time, even with this protection.

A bank's management team must ask themselves if they're undertaking risks that are appropriate to their size, scope, and operations. They must also ensure that their business lines and loan lending opportunities make sense for the bank.

Here are some key questions to ask about a bank's management team:

By asking these questions and being aware of the potential risks, banks and their customers can work together to prevent and recover from bank runs.

Bank runs can be unpredictable, but understanding the factors that lead to a bank's failure can help prevent or mitigate the damage. The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

When a bank fails, it's usually the result of interrelated factors, including insolvency, where the bank can no longer meet its obligations. The FDIC takes over the failed bank and negotiates a sale to another bank, but in extreme circumstances, there is no willing buyer.

The FDIC's primary goal is to restore confidence in banks and protect customers. In 1933, the FDIC was created to help reduce the likelihood of bank runs. No depositor has lost a penny of FDIC-insured funds since the agency was established.

Banks can fail due to insolvency, which occurs when a bank can no longer meet its obligations. The primary chartering authority revokes the bank's charter, and the FDIC takes over as receiver. The FDIC then meets its statutory obligation to guarantee all depositors up to $250,000 and liquidate the bank's assets to repay residual creditors.

The FDIC has a statutory priority scheme that gives preference to insured depositors and secured creditors. This approach is similar to a Chapter 7 bankruptcy, but with a different priority scheme.

Recovery from a bank run requires swift and decisive action. Franklin D. Roosevelt declared a national bank holiday in 1933 to allow for federal inspection of all banks.

The holiday was a crucial step in restoring public confidence in the banking system. Roosevelt's speeches on the radio helped to reassure citizens that the government would not let bank failures happen again.

The Banking Act of 1933 led to the formation of the Federal Deposit Insurance Corporation (FDIC). This body was given the authority to supervise, regulate, and provide deposit insurance to commercial banks.

The FDIC's deposit insurance has been a key factor in preventing bank runs from occurring in the US. By providing a safety net for depositors, the FDIC has helped to maintain public confidence in the financial system.

To avoid triggering a bank run, the FDIC performs takeover operations behind closed doors. This allows the bank to be reopened the next business day under new ownership.