Learn about bank runs and why they can be devastating for financial institutions. Find out if you should pull your money out of the bank and explore recent and historical examples of bank runs and closures.
by Maria Laus
Questions Answered in this Article
- What is a bank run and how does it happen?
A bank run occurs when depositors or customers try to withdraw their deposits from a bank due to concerns that the institution may fail. As more and more customers withdraw their deposits, a bank may exhaust all of its reserves and ultimately default.
- Should I pull my money out of the bank?
As an individual depositor, pulling your money out of the bank is generally unnecessary. Insured banks and credit unions are safe places to manage and store money. It’s more secure to deposit your funds in a bank account than to keep cash at home. If your bank or credit union is insured by the Federal Insurance Deposit Corp. or the National Credit Union Administration, your deposits are safe up to standard limits.
- What happened in March 2023 involving Silicon Valley Bank and Signature Bank?
In March 2023, there was a highly publicized bank run involving Silicon Valley Bank and Signature Bank. Silicon Valley Bank announced nearly $2 billion in losses, leading depositors and investors to attempt to withdraw $42 billion from the bank. Signature Bank experienced a 20% withdrawal of its deposits by customers. Both banks were closed by regulators due to their negative balance.
- What was the bank run of 1930?
The bank run of 1930 occurred in November when the Bank of Tennessee closed due to the collapse of Caldwell and Company. This led to panic among depositors and resulted in many more banks failing and closing. In December 1930, the Bank of United States closed down, triggering a bank run by depositors, leading to further panic and more bank runs. These events marked the beginning of the Great Depression.
- Are bank runs a common occurrence, and should individuals be worried about their bank failing?
Bank runs are not a common occurrence, and individual depositors should not be worried about their bank failing. Insured banks and credit unions are safe places to manage and store money. If your bank or credit union is insured by the Federal Insurance Deposit Corp. or the National Credit Union Administration, your deposits are safe up to standard limits. It’s wise to keep no more than the limits at a single financial institution.
What is a Bank Run?
When depositors or customers try to withdraw their deposits from a bank due to concerns that the institution may fail, it is referred to as a bank run. Typically, a bank run happens simultaneously, with people attempting to retrieve their money before the bank becomes insolvent or collapses. As more and more customers withdraw their deposits, a bank may exhaust all of its reserves and ultimately default.
Should I pull my money out of the bank?
Recently, the collapse of Silicon Valley Bank and Signature Bank and federal government intervention have brought bank runs to the forefront of the news. But what exactly is a bank run? Essentially, when customers attempt to withdraw their deposits from a bank out of fear, the institution will fail. This typically happens simultaneously, causing the bank to become insolvent as it uses up all its reserves due to many withdrawals.
However, as an individual depositor, pulling your money out of the bank is generally unnecessary. Insured banks and credit unions are safe places to manage and store money. It’s more secure to deposit your funds in a bank account than to keep cash at home, which could be lost or stolen. If your bank or credit union is insured by the Federal Insurance Deposit Corp. or the National Credit Union Administration, your deposits are safe up to standard limits. For example, as a bank member of the FDIC, the legal limit is $250,000 per depositor and ownership category. While it’s wise to keep no more than the limits at a single financial institution, bank failures are rare.
What happened in March 2023?
In March 2023, there was a highly publicized bank run involving Silicon Valley Bank. The CEO, Greg Becker, announced that the bank had incurred nearly $2 billion in losses. The following day, depositors and investors attempted to withdraw $42 billion from the bank, resulting in a negative balance of approximately $958 million. As a result, California regulators closed the bank the next day.
Additionally, Signature Bank experienced a 20% withdrawal of its deposits by customers, leading New York regulators to close the bank a few days later. These were the first bank failures since October 2020.
What was the bank run of 1930?
Bank runs are not a new phenomenon. In November 1930, the Bank of Tennessee closed due to the collapse of Caldwell and Company, the most significant financial holding company in the Southern US. As a result, other Caldwell-affiliated institutions shut down a few days later, causing panic among depositors and resulting in many more banks failing and closing. This trend spread rapidly, with hundreds of banks closing within a few weeks.
Then, in December 1930, the fourth-largest bank in New York City, the Bank of United States, closed down. This followed a failed merger attempt with another institution, which triggered a bank run by depositors. The state’s banking superintendent eventually shut down the bank, and the news of the event led to further panic and more bank runs. These events marked the beginning of the Great Depression.
However, the recent bank runs and closures appear to be isolated incidents sparked by unique circumstances. It’s unlikely that your bank will fail anytime soon.
Summary
- A bank run is when depositors try to withdraw their deposits due to concerns that the bank may fail.
- Bank runs can cause a bank to become insolvent and ultimately default.
- Insured banks and credit unions are safe places to store money, and it’s generally unnecessary to pull money out of a bank as long as it is insured by the Federal Insurance Deposit Corp. or the National Credit Union Administration.
- In March 2023, there were highly publicized bank runs involving Silicon Valley Bank and Signature Bank, resulting in their closures.
- Bank runs are not a new phenomenon and have occurred in the past, such as the Bank of Tennessee in 1930 and the Bank of United States in New York in the same year.
- The Federal Insurance Deposit Corp. (FDIC) is a US government agency that provides insurance to depositors in case their bank fails.
- Banks can prevent bank runs by maintaining adequate reserves and liquidity, diversifying their assets, and communicating with their customers.
