What Is a Bank Run?

The recent instability at certain regional banks has resulted in both a lot of fear among customers and increased market turmoil among investors. A lot of the talk has been centered around a bank run, something that, for many people, brings forth the mental image of a scene from It’s a Wonderful Life that depicted pure consumer panic.

The reality, recently, wasn’t a whole lot different than that classic film. Investors, concerned that their bank would shut down and they would not be able to access the money in their accounts, stood in line and frantically tried to effect wire transfers.

Bank runs are manifestations of a loss of confidence in a financial institution, when customers believe it will shut down in the near future. And while there has been a lot of chatter about them lately, they’re a rare event, especially in North America.

In the past 10 years, in fact, there have been just 72 bank failures in the U.S., with none resulting in bank runs. (That total, by the way, is less than the one-year sums of 2009 (140), 2010 (157) and 2011 (92).)

The last bank runs of note in the U.S. came in 2008, during the financial crisis that saw Washington Mutual shut down. Wachovia also saw massive drops in its total deposits as businesses and institutional investors drew down their accounts below the FDIC’s insurance guarantee, which stood at $100,000 at the time (a practice known as a “silent run”).

Fear spreads quickly, though, especially when it revolves around your ability to pay for food and shelter. And if enough people line up to withdraw their money, that can put the bank in the danger, as it doesn’t keep enough reserves to cover people’s withdrawals.

To put the recent runs in perspective, when Washington Mutual saw its bank run, the financial institution saw $16.7 billion dollars withdrawn over a 10-day period. At Silicon Valley Bank, the withdrawals on March 9 worked out to $4.2 billion per hour. The next day’s withdrawals were set to more than double that, before the state of California and the FDIC stepped in.

What’s particularly troubling about a bank run is the crisis of confidence doesn’t necessarily affect just customers of that financial institution. The sudden collapse of one bank could raise doubts in customers of others. Panic, after all, begets panic.

There are stopgaps in place, though, to prevent a systemic collapse. During a series of runs in 1933, President Roosevelt declared a national bank holiday, which gave financial institutions a moment to catch their breath and determine if they were solvent enough to continue operations. Later that year, the FDIC was formed, insuring deposits up to a certain level and empowered to takeover a struggling bank, reopening it the next day under new ownership.

With the most recent events, the FDIC has had to take some unusual steps. While deposits are only insured up to $250,000 per account holder in most instances, the government pledged to cover uninsured deposits as well this time around, to avoid a larger financial collapse.

“[This policy] sends a powerful signal that depositors will be made whole in the current environment and also removes the mark-to-market risk that many were worried about,” said analysts at Morningstar in a research note. “These steps should go a long way toward being a circuit breaker on the current panic in the financial system, although we're not sure there is a way to undo the psychological change.”

Proactive moves like that are meant to halt additional runs before they happen. So far, they seem to have worked.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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