What Are Bank Runs and Why Do They Happen?

A bank run occurs when a large number of depositors withdraw their money from a bank at the same time, often due to a loss of confidence in the bank's ability to meet its financial obligations.

This can happen when a bank is perceived to be unstable or on the verge of collapse, causing a panic among depositors who fear they won't be able to access their funds.

Bank runs can also be triggered by rumors or misinformation about a bank's financial health, which can spread quickly through social media or other channels.

In extreme cases, a bank run can lead to a bank's collapse, resulting in financial losses for depositors and potentially even the broader economy.

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A bank run is a situation where many depositors withdraw their money from banks at the same time, typically due to fears that the institution will become insolvent.

This is often triggered by a perceived risk that the bank will collapse, causing a domino effect where more and more people try to withdraw their funds.

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Customers in bank runs usually withdraw money based on fears of insolvency, which can quickly deplete a bank's cash reserves.

With more people withdrawing money, banks will use up their cash reserves and can end up in default.

Bank runs have occurred throughout history, including during the Great Depression and the 2008 financial crisis.

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to try to reduce the occurrence of bank runs.

Here are the key characteristics of a bank run:

Bank runs have a long and complex history, dating back to the early days of banking. The first recorded bank run occurred in 1694, when the Bank of England was forced to suspend payments due to a lack of gold reserves.

A key factor contributing to bank runs is the loss of confidence in a bank's ability to honor its deposits. This can be triggered by a bank's financial struggles, such as the case of the Bank of the United States, which failed in 1841 due to a series of financial mismanagement.

The 1930s saw a devastating bank run in the United States, known as the Great Depression, where millions of depositors withdrew their funds from banks, leading to widespread bank failures.

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The stock market crash of 1929 is often cited as a major cause of the Great Depression. This devastating event wiped out millions of dollars in investments and led to a massive loss of faith in the US economy.

The collapse of the banking system was another significant contributor to the Great Depression. Banks had invested heavily in the stock market and held large amounts of worthless stocks, making them insolvent and unable to lend money to their customers.

The Smoot-Hawley Tariff Act, passed in 1930, raised tariffs on imported goods and led to retaliatory measures from other countries. This resulted in a sharp decline in international trade, further exacerbating the economic downturn.

The widespread drought and subsequent dust bowl in the US Midwest in the early 1930s led to a decline in agricultural production and a loss of livelihood for many farmers.

The history of bank runs is a fascinating and sometimes frightening topic. The first recorded bank run occurred in 1690 in Massachusetts, during the colonial era.

This event was sparked by a panic over the value of paper money, which was then a relatively new concept. The Massachusetts Bay Colony's government had issued paper currency to finance its military efforts, but the value of this currency plummeted, leading to widespread panic and a run on the banks.

In 1797, a bank run occurred in England due to a lack of confidence in the banking system. This event was triggered by a combination of factors, including a war with France and a lack of specie (gold and silver coins) in circulation.

The lack of specie led to a shortage of coins, which in turn led to a decrease in the value of paper money. This created a sense of unease among the public, who began to withdraw their deposits from the banks in large numbers.

The bank run of 1907 in the United States was a major catalyst for the creation of the Federal Reserve System. This event was triggered by a combination of factors, including a severe economic downturn and a lack of confidence in the banking system.

The bank run was so severe that it led to a 50% decline in the value of the dollar, and the government was forced to intervene to prevent a complete collapse of the banking system.

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An institution run can bring down an institution and cause a more systemic financial crisis. This happened in 2008 when Lehman Brothers collapsed, contributing to the financial crisis, according to the Brookings Institution.

In extreme cases, an institution run can cause the collapse of an institution, as seen in the case of Silicon Valley Bank in 2023. The bank became insolvent due to a bank run.

A bank run is when customers lose confidence in an institution and flock to withdraw their funds. This can happen physically or online, and can cause an institution to run out of cash.

The Federal Reserve Bank of St. Louis explains that a bank run can happen quickly, and the speed and size of the run can be unpredictable. This makes it difficult for an institution to prepare for and respond to a run.

An institution usually only has a limited amount of cash on hand, which is not the same as its overall deposits. This means that if too many customers demand their money, the institution simply won't have enough to return to their depositors.

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In the case of Silicon Valley Bank, the institution did not have enough cash to meet the demands of its depositors, leading to its collapse. The FDIC created a national deposit bank to protect depositors, as reported by the FDIC.

The FDIC's Deposit Insurance Fund is designed to protect depositors in the event of an institution's collapse. This fund is used to pay out deposits up to the insured amount, as explained by the FDIC.

The Federal Reserve has a number of tools to help prevent and respond to institution runs, including reserve requirements. These requirements can help ensure that institutions have enough cash on hand to meet the demands of their depositors.

Here is a list of some of the key events and institutions involved in institution runs:

These events and institutions highlight the importance of understanding institution runs and the measures that can be taken to prevent and respond to them.

Bank runs have happened in the past, causing significant economic impacts. The Great Depression was a major example, with American depositors panicking and withdrawing their deposits after the 1929 stock market crash.

The early 1930s saw thousands of bank runs, creating a domino effect on the economy. This shows how quickly a bank run can spread and cause widespread damage.

Wachovia Bank was another significant example, with depositors withdrawing over $15 billion in a two-week period after negative earnings results. This was a major financial loss for the bank.

Wachovia was eventually acquired by Wells Fargo for $15 billion. This deal shows how quickly a bank can be taken over after a bank run.

Much of the withdrawals at Wachovia were from commercial accounts with balances above the FDIC limit, which is $250,000 per depositor, per insured bank. These accounts were drawn down to just below the FDIC limit.

Silicon Valley Bank, Washington Mutual Bank, and Wachovia Bank are all recent examples of significant bank runs.

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Governments have taken steps to diminish the risk of future bank runs, such as establishing reserve requirements, which mandate that banks maintain a certain percentage of total deposits on hand as cash. This requirement has since been reduced to zero by the Federal Reserve.

Deposit insurance systems, like the FDIC, insure each depositor up to a certain amount, protecting their savings even if the bank fails. This removes the incentive to withdraw one's deposits due to others withdrawing theirs.

To prevent bank runs, banks can take a proactive approach, such as temporarily closing to prevent people from withdrawing their money en masse. This was done by Franklin D. Roosevelt in 1933.

Bank capital requirements can reduce the possibility that a bank becomes insolvent. For example, the Basel III agreement strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

Transparency can also help prevent crises from spreading through the banking system. In the context of the 2007-2010 subprime mortgage crisis, the extreme complexity of certain types of assets made it difficult for market participants to assess which financial institutions would survive.

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Central banks can act as a lender of last resort, guaranteeing that they will make short-term loans to banks to ensure they have enough liquidity to honor their deposits. This is a standard practice, as the benefits of collective prevention are commonly believed to outweigh the costs of excessive risk-taking.

Techniques to deal with a banking panic when prevention has failed include declaring an emergency bank holiday and government or central bank announcements of increased lines of credit, loans, or bailouts for vulnerable banks.