What Is a Bank Run?
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Bank runs have been in the news recently as a result of the First Republic Bank, Silicon Valley Bank and Signature Bank collapses and the federal government’s subsequent intervention.
But what exactly is a bank run? Here’s what you need to know along with a few notable examples.
What is a bank run?
A bank run occurs when depositors (that is, customers) attempt to withdraw their money (deposits) from a bank because they fear the institution will fail. Generally, a bank run occurs en masse. People will attempt to get their cash out at the same time before the bank becomes insolvent (i.e., collapses). As more customers withdraw their deposits, a bank can use up all its cash reserves and end up defaulting.
» Find out if you’re affected: Ask a Nerd: How Does SVB’s Closure Affect Me?
Should I pull my money out of the bank?
If you're an individual depositor, the short answer is "probably not." Insured banks and credit unions are secure places to keep and manage your money. It’s safer to deposit your funds into a bank account than it is to stash cash at home, where it could be subject to theft or be lost in a disaster.
Deposits at a bank or credit union that is insured by the Federal Insurance Deposit Corp. or the National Credit Union Administration are safe up to the standard limits. That includes cash held in checking and savings accounts, money market accounts and certificates of deposit.
At a bank that’s a member of the FDIC, the standard limit is $250,000 per depositor and per ownership category at that bank. The same holds true at a credit union that’s a member of the NCUA. It’s advisable to keep no more than those limits at a single financial institution, so that your funds are guaranteed should the bank fail. Keep in mind, though, that bank failures happen very rarely.
» Need to protect a higher balance? Learn how to insure over $250,000
What happened in March 2023?
A high-profile bank run occurred in early March 2023 (read about what to do when bank-run panic sweeps social media). Silicon Valley Bank’s CEO Greg Becker announced that the institution had lost close to $2 billion. The next day, depositors and investors attempted to withdraw $42 billion out of the bank. That left the bank with a negative balance of about $958 million. The following day, the bank was closed by California regulators.
Meanwhile, customers withdrew about 20% of Signature Bank’s deposits within hours, leaving the bank with a negative balance by the end of the day. A couple days later, as concerns about the bank’s continued ability to meet customer withdrawal demand mounted, New York regulators officially closed the bank. Silicon Valley Bank and Signature Bank were the first banks to fail since October 2020.
What was the bank run of 1930?
Bank runs are nothing new. In November 1930, the Bank of Tennessee closed as a result of the collapse of Caldwell and Company, then the largest financial holding company in the South. Other Caldwell affiliate institutions shuttered a few days later, resulting in many more banks failing and closing. In those places where banks shut down, depositors joined in bank runs. This trend ignited panic, spurring runs in other areas. Hundreds of other banks were forced to close — all within the span of a few weeks.
Then, in December 1930, the fourth-largest bank in New York City closed. The bank, Bank of United States, had been planning to merge with another institution, but when that fell through, depositors began a bank run. The state’s banking superintendent shut down the bank. News of this event caused further panic and resulted in more depositors making runs at other banks. These bank runs and closures marked the start of the Great Depression.
The recent bank runs and subsequent closures appear to have been isolated incidents ignited by unique sets of circumstances. Chances are good that your bank won’t fail any time soon.
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