Bank Run: What It Is and How It Affects You

With the recent bank failures and closures of Signature Bank and Silicon Valley Bank in March 2023, all financial institutions now are under a microscope. The Federal Deposit Insurance Corporation, or FDIC, aside, banking systems in the United States are a fragile ecosystem possibly closer to the brink than you may like to think.

What does it mean to you and your finances if a bank crisis starts and a bank run occurs?

What Is a Bank Run?

When customers en masse attempt to withdraw their funds from their bank accounts because they are in fear of a collapse, this is considered a bank run. The bank itself does not have enough money for when everyone simultaneously tries to empty their deposits, causing the bank to fail when it defaults — it uses up its cash reserves and becomes insolvent.

Can a Bank Run Still Happen?

Though bank runs aren’t likely and don’t occur often, they are not out of the realm of possibility. With the recent collapses of major banks, a large number of consumers and economists are scratching their heads as to what this could mean — if more people begin to suddenly withdraw their money from banks out of fear, there could be another bank run.

National institutions are regulated and stabilized by the Federal Reserve System, but it doesn’t mean bank runs are a thing of the past.

Is It Safe to Put Your Money in the Bank?

Though nothing is completely risk-free, your money is safe in an FDIC-insured bank, as long as you know the limits of that insurance.

The Silicon Valley Bank collapse, for example, happened because over 90% of the domestic deposits weren’t FDIC-insured — they were over the maximum insurance amount of $250,000. It largely catered to wealthy clientele, the majority of whom were startup founders. When the bank started to struggle, its clients pulled their money out to avoid losing it.

What Is FDIC Insurance?

After the bank run of 1930, deposits became insured by the Federal Deposit Insurance Corporation. If your bank is FDIC-insured, your funds are covered up to $250,000 per depositor, per account type — making the money you’ve deposited quite secure.

The History of Bank Runs

In order to not repeat history, it is helpful to learn from it.

The Bank Run of 1930

One of the biggest bank runs in history occurred in 1930, triggered by the failure of the Bank of the United States. After the stock market crash of 1929, many depositors grew fearful and commenced a bank run unlike any America had seen before or since.

This led to a domino effect of bank failures, and approximately 9,000 banks collapsed, taking with them an estimated $7 billion in customer assets. At that point, there was no deposit insurance, so that money was simply gone. The loss of this magnitude for so many people led to the Great Depression.

Silent Bank Run of 2008

Often referred to as the Great Recession or subprime mortgage crisis, the financial crisis of 2008 was a result of the collapse of the housing market in the United States. Though this is where it originated, the contraction of liquidity in markets spread globally.

This led to a silent bank run, which is similar to a regular bank run — but in the digital age, depositors don’t have to physically withdraw their funds in person. Though not as catastrophic as the Great Depression, this crisis did drain reserves across the United States, United Kingdom and Iceland. This put many financial institutions in danger of collapsing.

Final Take To GO

It is scary to think your life savings could disappear because of a bank’s mistakes. Having learned from devastating lessons of the past, the U.S. and Federal Reserve System have put safety measures in place to ensure history doesn’t repeat itself.

It is always a good idea to keep abreast of your bank’s financial status, but there is no need to panic and go for a run.

FAQ

Here are the answers to frequently asked questions about what bank runs are and how they affect you.

• Can bank runs still happen?

  • Bank runs can still happen, but they do not occur often. All it takes for a bank run to happen is for people to begin to suddenly withdraw their money and deposits from banks at the same time out of fear.

  • Because national banks are regulated and stabilized by the Federal Reserve, bank runs can be better contained, but that doesn't make them an easy situation to handle, especially if a large number of banks are hit.

• Was there a bank run in 2008?

  • Yes, there was a bank run in 2008 in the form of a silent bank run, which is when depositors en masse try to simultaneously withdraw money from their accounts via such digital avenues as wire transfers or electronic fund transfers.

• What is the biggest bank run in U.S. history?

  • The biggest bank run in U.S. history occurred in 1930, when customers performed a bank run across the country. All in all, 9,000 banks collapsed, taking with them an estimated $7 billion in customer assets. This bank run on the Bank of the United States was a result of the stock market collapse and was the precursor to several other bank runs, which then led to the Great Depression.

• What was the bank run of 1930?

  • The bank run of 1930 followed the stock market crash of 1929, when depositors grew fearful and commenced a bank run on the Bank of the United States and many others. This caused the banks' closure and eventually the Great Depression.

This article originally appeared on GOBankingRates.com: Bank Run: What It Is and How It Affects You