The bankruptcy of Silicon Valley Bank has brought the average person’s attention to the old term, “a run on the bank,” but what exactly does that mean and what have been the biggest runs in our lifetime?
A bank run is a phenomenon in which a large number of depositors withdraw their funds from a bank at the same time, typically due to concerns about the bank’s solvency. This can lead to a liquidity crisis for the bank, which can ultimately result in its failure. In the United States, there have been several notable bank runs since 1950, each with their unique causes and consequences. In this article, we will examine some of the most significant bank runs in American history and explore the potential dangers the US faces for future bank runs.
What exactly happens in a bank run?
During a bank run, depositors line up at the bank to withdraw their funds. As more and more depositors withdraw their funds, the bank’s reserves become depleted, and it becomes increasingly difficult for the bank to meet the demand for withdrawals. This can lead to a vicious cycle in which the bank’s financial difficulties are exacerbated by the run, leading to even more depositors attempting to withdraw their funds.
In some cases, the bank may be able to satisfy the demand for withdrawals by using its own reserves, borrowing from other banks, or selling assets. However, if the bank is unable to meet the demand for withdrawals, it may be forced to declare bankruptcy or be taken over by regulators. This can result in losses for depositors, as they may only be able to recover a portion of their funds from the FDIC, which insures deposits up to a certain amount.
The collapse of a bank can have wide-ranging consequences for the economy. Foremost, it can lead to a loss of confidence in the banking system as a whole, as depositors begin to question the safety of their funds. This can lead to other banks experiencing runs, potentially causing a wider financial crisis.
The major bank runs since 1984
Continental Illinois National Bank and Trust Company (1984)
The Continental Illinois National Bank and Trust Company was the seventh-largest bank in the United States when it experienced a bank run in 1984. The bank was heavily invested in the energy sector, which suffered from falling oil prices and rising interest rates. As a result, the bank experienced a significant increase in loan losses and was unable to meet its depositors’ demands for withdrawals.
The US government stepped in to prevent a complete collapse of the bank, providing a $4.5 billion bailout and taking control of the bank’s operations. This marked the first time that the US government had intervened to save a failing bank since the Great Depression.
Bank of United States (1991)
The Bank of United States was a New York City-based bank that was founded in 1913. The bank’s primary customers were immigrants and small business owners, and it was known for its high-interest rates and aggressive marketing tactics.
In the late 1980s, the bank’s management began to make increasingly risky loans to real estate developers, many of which defaulted. This led to a decline in the bank’s assets and a loss of confidence among its depositors.
On December 11, 1990, the bank was closed by the Federal Deposit Insurance Corporation (FDIC), and depositors were only able to recover a portion of their funds. The bank’s failure was one of the largest in US history at the time, with losses estimated at $2.5 billion.
IndyMac Bank (2008)
IndyMac Bank was a California-based bank that specialized in subprime mortgages. The bank’s aggressive lending practices and lax underwriting standards led to a high number of defaults, and the bank was eventually seized by the FDIC in July 2008.
The bank’s failure was significant, with losses estimated at $10.7 billion. The failure also had wider implications for the US financial system, as it marked the largest bank failure since the Great Depression and contributed to the wider financial crisis that began in 2008.
Washington Mutual (2008)
Washington Mutual was a Seattle-based bank that was one of the largest savings and loan institutions in the United States. The bank had a significant exposure to the subprime mortgage market, and as a result, it experienced significant losses when the housing market collapsed in 2008.
The bank was seized by the FDIC in September 2008, and its assets were sold to JPMorgan Chase. The failure was significant, with losses estimated at $307 billion.
Northern Rock (2007)
Northern Rock was a British bank that experienced a bank run in 2007. The bank had been heavily invested in the US subprime mortgage market and was unable to obtain funding from other banks due to concerns about its solvency.
As news of the bank’s difficulties spread, depositors began to withdraw their funds, leading to a run on the bank. The UK government eventually nationalized the bank to prevent its collapse, and it was later sold to Virgin Money.
The potential dangers the US faces for future bank runs
Despite the significant bank failures of the past, there are several potential dangers that the US faces for future bank runs. First, the US banking system remains highly interconnected, with many large banks holding significant exposure to each other. This means that the failure of one bank could potentially lead to a domino effect, with other banks also experiencing runs as a result.
Second, there is growing concern about the rise of digital currencies and the potential for these currencies to disrupt traditional banking systems. While digital currencies such as Bitcoin and Ethereum have yet to achieve mainstream adoption, there is a risk that they could become more widely used in the future, potentially leading to a loss of confidence in traditional banking systems.
Third, the US banking system remains highly leveraged, with many banks holding large amounts of debt relative to their equity. This means that even small losses can have a significant impact on a bank’s balance sheet, potentially leading to a loss of confidence among depositors.
While the US banking system has weathered several significant bank runs in the past, it remains vulnerable to future crises, including this latest run. To prevent future bank runs, policymakers will need to address some of the underlying vulnerabilities in the banking system, such as high levels of leverage and interconnectedness. Additionally, regulators will need to closely monitor emerging risks, such as the rise of digital currencies and the impact of climate change on the banking system. Only by taking these steps can we hope to prevent future bank runs and maintain stability in the US financial system.
