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 1most 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 23because 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 runsin 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 4more recent examples of significant bank runs include those on silicon valley bank washington mutual bank wamu and wachovia bank 5the 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that it needed 2 25 billion to shore up its balance sheet and by the end of the following business day customers had withdrawn about 42 billion as a result regulators closed the bank and took control of its assets 67silicon valley bank had last reported 209 billion in assets as of the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 8washington 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 9jpmorgan chase eventually bought washington mutual for 1 9 billion 10wachovia bank was also shuttered after depositors withdrew more than 15 billion over a two week period following negative earnings results wachovia was eventually acquired by wells fargo for 15 billion 1112much 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 1314preventing bank runsin 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 1516additionally 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 17the 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 18in 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 1920in 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 21