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What Is a Bank Run? A bank run is when the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank's solvency. As more people withdraw their funds, the probability of default increases, which, in turn, can cause more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals. KEY TAKEAWAYS A bank run occurs when a large group of depositors withdraw their money from banks at the same time. Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. 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. How Bank Runs Work Bank runs happen when a large number of people start making withdrawals from a bank because they fear the institution will run out of money. A bank run is typically the result of panic rather than true insolvency. However, a bank run triggered by fear can push a bank into bankruptcy. Most institutions have a set limit on how much they store in their vaults daily. These limits are set based on need and security reasons. Many banks also keep specific amounts in reserve at the nation's central bank to minimize the risks related to bank runs and other issues. In fact, the Federal Reserve pays them interest to do so, a program which it calls Interest on Reserve Balances (IORB). This program gives banks an incentive to keep deposits in reserve. Because banks typically keep only a small percentage of deposits as cash on hand, they must increase their cash position to meet the withdrawal demands of their customers. One method a bank uses to increase cash on hand is to sell assets—sometimes at significantly lower prices than if it did not have to sell quickly. Losses taken when selling assets at lower prices can cause customer concerns, which can trigger withdrawals. Examples of Bank Runs In modern history, bank runs are often associated with the Great Depression. In the wake of the 1929 stock market crash, American depositors panicked and began withdrawing their deposits. A succession of bank runs on thousands of banks occurred in the early 1930s, creating a domino effect on the economy. More recent examples of significant bank runs include those on Silicon Valley Bank, Washington Mutual Bank (WaMu), and Wachovia Bank. Silicon Valley Bank The collapse of Silicon Valley Bank in March 2023 was a result of a bank run caused by venture capitalists. The bank reported that it needed $2.25 billion to shore up its balance sheet, and by the end of the following business day, customers had withdrawn about $42 billion. As a result, regulators closed the bank and took control of its assets. Silicon Valley Bank had last reported $209 billion in assets as of the fourth quarter of 2022, making it the second-largest bank failure of all time.7 Washington Mutual (WaMu) Washington Mutual (WaMu), which had about $310 billion in assets at the time of its failure in 2008, was the largest bank failure in the U.S. Its collapse was caused by several factors, including a poor housing market and rapid expansion. The bank also suffered a run when customers withdrew $16.7 billion within two weeks. JPMorgan Chase eventually bought Washington Mutual for $1.9 billion. Wachovia Bank Wachovia Bank was also shuttered after depositors withdrew more than $15 billion over a two-week period after Wachovia reported negative earnings results. Wachovia was eventually acquired by Wells Fargo for $15 billion. Much of the withdrawals at Wachovia were concentrated among commercial accounts with balances above the limit insured by the Federal Deposit Insurance Corporation (FDIC), drawing those balances down to just below the FDIC limit. The failure of large investment banks like Lehman Brothers, AIG, and Bear Stearns was not the result of a bank run. Instead, these bank failures resulted from a credit and liquidity crisis involving derivatives, asset-backed securities, and poor risk management practices. Preventing Bank Runs In response to the turmoil of the 1930s, governments took several steps to diminish the risk of future bank runs. Perhaps the biggest was establishing reserve requirements, which mandated that banks had to maintain a certain percentage of total deposits on hand as cash. This requirement has since been reduced to zero by the Federal Reserve because other monetary policy tools have been created. Additionally, the U.S. Congress established the FDIC in 1933 to insure bank deposits in response to the many bank failures in the preceding years. Its mission is to maintain stability and public confidence in the U.S. financial system. The FDIC provides insurance based on ownership category. There are several FDIC-recognized ownership categories, but generally, each depositor is insured for up to $250,000 in each different category. In some cases, the FDIC may extend its coverage. For example, when Silicon Valley Bank failed in 2023, the FDIC used funds from the Deposit Insurance Fund to fully reimburse depositors. The money in the fund is furnished by quarterly fees assessed on banks.1516 In some cases, banks need to take a more proactive approach if faced with the threat of a bank run. For example, they may temporarily close to prevent people from withdrawing their money en masse. Franklin D. Roosevelt implemented another solution when he declared a bank holiday in 1933, calling for inspections to ensure banks' solvency so they could continue operating. What Is a Silent Bank Run? A silent bank run is when depositors withdraw funds electronically in large volumes without physically entering the bank. Silent bank runs are similar to other bank runs, except funds are withdrawn via ACH transfers, wire transfers, and other methods that do not require physical withdrawals of cash. What Is Meant by a Run on the Bank? This happens when people try to withdraw all of their funds for fear of a bank collapse. When this is done simultaneously by many depositors, the bank can run out of cash, causing it to become insolvent. Why Is a Bank Run Bad? Bank runs can bring down banks and cause a more systemic financial crisis. A bank usually only has a limited amount of cash on hand that is not the same as its overall deposits. So, if too many customers demand their money, the bank simply won't have enough to return to their depositors. The Bottom Line A bank run is when customers flock to banks, either physically or online, to withdraw their funds because they lose confidence in the bank. In extreme cases, they can cause the collapse of a bank, as a bank run did in 2023 when Silicon Valley Bank became insolvent. To reduce your risk of losing money in a bank run, you can keep your deposit amounts under the FDIC-insured limit of $250,000 per depositor, per insured bank. If you need to deposit more funds, you can open an account at another bank and receive the same protection. SoUrce : https://t.co/32DFSJurd6 SharEMan : Elonoshi Muskamoto