Bank Runs

When customers attempt to withdraw their funds from a bank in masses, this is commonly known as a bank run. True to its name, bank runs are usually a response to customer fears that a bank is on the brink of failing. Examples of historical bank runs include the collapse of Silicon Valley Bank, Washington Mutual, First Republic Bank, and Signature Bank.

What Happens During a Bank Run?

Bank runs can be catastrophic for banks if customers all try to withdraw their money at once. The bank may have to pull from their cash reserves to meet the demand, which could lead to them defaulting. Banks are at greater risk of defaulting when their liabilities exceed their assets. That said, fractional reserve banking was designed to ensure banks have cash in their reserves to minimize the risk of defaulting.

What causes masses of customers to withdraw their funds at once? It’s usually a knee-jerk response to bank officials announcing financial difficulties or news outlets reporting a bank’s financial crisis. Customers lose confidence in the bank and pull their money out as a result.

Minimizing Risk

Putting money into FDIC insured banks is one way to minimize the risks that come with bank runs. These are banks backed by the Federal Deposit Insurance Corporation-an organization that protects customer’s funds when banks default. The banks cover up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

In the event that a bank run happens and a bank collapses, people who hold funds in FDIC-insured banks can salvage their funds assuming they don’t exceed $250,000. Majority of banks are FDIC insured including both physical and digital entities. Customers don’t need to enroll in FDIC-insured banks–as long as they’re banking with an institution that’s FDIC insured, their funds are covered. Customers also don’t need to file a claim to recoup their funds in the event a bank fails.

It’s important to note that investments purchased through a bank aren’t covered if that institution collapses. Assets inside of a safe-deposit box also aren’t salvageable.

History Of Bank Runs

The government has gotten progressively better at protecting businesses and customers from bank failures. For instance, FDIC Insurance was created in response to the Banking Act of 1933. The act was passed to restore the public’s confidence in banks after the Great Depression, one of the most severe financial crises in US history. During this era, there was no insurance for banks, so many people lost all of their life savings.

More recently, Silicon Valley Bank closed its doors because of a bank run, which was the largest bank run since 2008. The bank invested heavily in treasury bonds and an uptick in yields caused the value of those assets to plummet (when bond yields go up, the price of the bond goes down). The FDIC helped customers recover their assets so the damage wasn’t as detrimental as past bank runs.

While bank runs have happened over the years, they aren’t a frequent occurrence. Banks are a relatively safe and secure place to keep money. That said, it’s ideal to ensure your money is not all held in cash and you have reserves in other places like stocks, bonds, and other investments.