There are a loads of events that can affect the economy in different ways. One of the events with the greatest potential to cause economic distress is a bank run.
When a bank run happens, it can have a devastating effect on people’s financial lives and the financial system as a whole.
In this article, we'll discuss what a bank run is, the list of bank runs in 2022 & 2023, the causes of bank runs, how to prepare for a bank run, as well as some government and banking industry responses to bank runs.
What is a Bank Run?
A bank run is when a large number of depositors look to withdraw their bank deposits at the same time. This can happen when depositors lose confidence in the bank's ability to pay its debts and believe the bank may fail in the near future.
As more and more depositors rush to withdraw their money before the bank collapses, this leads to a liquidity crisis, ironically making the chances of a bank failure happening much higher.
Bank runs are a common feature whenever the banking system is thrown into turmoil during a financial crisis.
Causes of Bank Runs
Ultimately, any bank run happens because of a loss in confidence in the bank, which leads to mass panic — so the real motivating force at play is fear. The specific events precipitating this loss of confidence can vary, but some of the major causes are as follows:
#1: News Events
Sometimes, news events can scare off bank customers. For example, news of a bank's failure in another country can cause depositors to lose confidence in their own bank and look to withdraw their money.
Rumors also have the potential to trigger a bank run. If depositors hear rumors about a particular bank's financial stability, that can cause a rush to withdraw money, even if it later turns out the rumors were false.
#3: Financial Instability
When it becomes clear that a bank is in financial trouble, it sews the seeds of fear that a collapse is imminent and people become scared of losing their deposits. That leads people to feel they must cash out immediately while they still can.
#4: War or Pandemic
During pandemics or war, people enter survival mode and may attempt to cross borders and flee on mass taking their financial assets with them.
Bank Runs in 2022
Twenty twenty-two saw a number of bank runs triggered by the Russian invasion of Ukraine. Initially, a branch of Russian bank Sberbank in the Czech Republic experienced a bank run as depositors looked to withdraw their funds over fears of instability, but also as a show of support for Ukraine.
A few days later sanctions were announced and Russian banks were removed from the SWIFT system, leading to widespread bank panic involving multiple other banks operating out of Russia.
Bank Runs in 2023
Twenty twenty-three has already witnessed the biggest bank run in history. When Silicon Valley Bank publicly reported it needed $2.25 billion to plug a hole in its balance sheet, the next day saw bank customers withdraw funds to the tune of $42 billion.
How to Protect Yourself for a Bank Run
As a customer, it is important to be prepared for a bank run, no matter how slim the chances of it happening. Here are some ways you can do that:
#1: Spread Your Money Across Different Banks
One way to guard against the fallout from a bank run is to spread your money across multiple banks and financial institutions and limit the total amount you deposit in any one bank.
This helps to decrease your exposure and reduces your overall risk if a bank fails.
#2: Keep Some Cash at Home
Keeping some cash at home is also a good idea. That way, even if banks are closed, you still have ready access to a supply of cash you can use.
#3: Monitor Your Bank's Financial Health
It always pays to keep a close eye on the financial health of any institutions you bank with. Check financial reports, look out for any relevant news articles, and monitor online forums.
This will help you identify any signs of financial instability and give you time to take action before it's too late.
#4: Diversify your highly liquid assets
As tempting as it might be to store your funds in a fixed deposit for a safe annual return, try to allocate a portion of your funds to cryptocurrency or foreign currencies.
This could also protect you from bank runs as well as uncontrollable inflation rates in your local currency.
Government and Banking Industry Responses to Bank Runs
After the great depression of the 1930's, some important preventative measures were put in place to help deal with any future bank runs. And even when a bank run does occur, the government and the banking industry won't just stand idly by and watch.
There are various different potential actions that can be taken to prevent any crisis from escalating.
Bank mitigation measures
Banks aren't helpless in the face of a bank run, there are certain measures they themselves can take to try and avert disaster.
#1: Operate Responsibly
While in some cases bank runs are triggered by unavoidable external factors, other times the finger of blame can be pointed squarely at the institution itself. It may sound obvious, but often the best way for a bank to avoid getting caught up in a bank run can be as simple as acting responsibly in the first place.
#2: Create delays
Sometimes a bit of good old fashioned spanner in the works can help buy a bank enough time to avert a bank run and stave off a crisis. This might involve 'technical issues' slowing down the banking process and prevent transactions from completing, for example.
#3: Borrow Money
If a bank's cash reserves are insufficient to deal with the withdrawal demands being placed on it, then one option is to borrow money — either from other banks or from a central bank. Central banks are there to protect the financial system and prevent sweeping bank failures from wreaking havoc, after all. A big enough loan may be the difference between a bank surviving or becoming the next Washington Mutual.
Government mitigation measures
Governments play an extremely important role in averting financial disasters, and have a number of strings they can pull when it comes to dealing with bank runs.
#1: Reserve Requirements
Banks are often required to maintain a certain percentage of the total deposits on their books known as a reserve requirement. This refers to the amount of actual cash financial institutions must possess, either in their own vaults or at the closest Federal Reserve bank, proportional to the deposits made by their customers. The idea is to be able to cope even if abnormally large withdrawal demands are placed on it.
#2: Deposit insurance
Deposit insurance is also an effective way of protecting customers against a bank run. In the U.S. for example, congress established the deposit insurance corporation FDIC in 1933 as a response to the catalog of bank failures that been happening during the Great Depression. Its sole purpose is to ensure the stability of the U.S. financial system. The FDIC insure up to $250,000 per depositor, per bank account (provided it's an insured bank).
#3: Bank holiday
In some instances, closing entirely may be one way that banks maintain solvency in the face of a potential bank run. This is what happened in 1933, when FDR declared a bank holiday to protect commercial banks from a bank run happening during the great depression.
In extreme cases, the government may provide financial support to the affected bank to prevent it from failing entirely if it's deemed necessary for the health of the wider financial system.
The Federal deposit insurance corporation FDIC in the U.S. decided to bail out Silicon Valley Bank rather than risk the consequences of its failure, for example.
Banking on a stable future
Thankfully, bank runs are rare, but when they do happen, the impact can be devastating, not just for people's financial lives but for the global economy as a whole. Think of the Silicon Valley bank run in 2023 we mentioned earlier for example.
That's why, even with the measures governments and banks can take, it's still so important for a customer to stay aware and exercise sensible precautions.
That way, you can protect yourself from the potential negative consequences of a bank run if and when it does occur.
This article is updated with newer resources on the 30th of October, 2023.