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If your money is in an FDIC-insured bank, your deposits are protected up to $250,000 per account in the event of a catastrophic bank event. Yet people still get nervous if they think a bank might fail. And unsurprisingly, many want to withdraw their money as soon as possible when they smell trouble.
When a significant number of customers pull their deposits from a financial institution at the same time, this is known as a bank run. Panic-induced bank runs are not uncommon, historically. In fact, the largest bank run in American history happened this year when customers of Silicon Valley Bank rushed to withdraw their funds. The Federal Reserve Bank of St. Louis predicts that the size and speed of bank runs are likely to increase due to the ease of digital transactions and the rate information spreads via social media.
What Is a Bank Run?
Put simply, a bank run occurs when a large portion of a bank’s customer base withdraws money from their accounts in a short period of time because they fear the institution might go out of business. Multiple factors can influence depositors’ trust in a bank. For instance, if a bank expands too quickly or invests poorly, customers may grow nervous.
Once word gets out that a bank doesn’t have a lot of cash reserves or the ability to liquidate, people may literally run to the bank to take out their money. In more recent years, the term “bank run” has become metaphorical because people transfer money digitally.
What Happens During a Bank Run?
People who withdraw their money from a troubled bank may be acting independently or in concert. According to the Federal Reserve Bank of St. Louis, an analysis of recent bank runs shows that depositors often withdraw money in coordinated efforts. Depositors may have mutual venture capital backers who help them time withdrawals, or they may plan their withdrawals directly using text messages, emails or social media posts.
Once a bank run happens, banks try to cover their losses using reserves or by attracting new depositors. However, these efforts are often unsuccessful.
Many banks don’t have the cash reserves necessary to cover a major loss of current deposits. If the bank can’t cover the losses, it will become insolvent. Customers who still have money in the bank will either have their assets assumed by another bank or be paid out up to $250,000 by the FDIC.
What Causes a Bank Run?
Bank runs arise when a large number of customers lose confidence in a bank and believe it’s about to fold. Typically, banks profit by taking deposits and then underwriting loans to other customers. And as long as they charge higher interest rates to borrowers than they pay out to depositors, they should have enough money to operate and maintain cash reserves. When one of those variables changes, and a bank is in trouble, worried depositors want to protect their funds by putting them elsewhere.
Whether or not a bank is going to go under, a bank run may cause the very collapse that customers were worried about. In other words, a bank run can become a self-fulfilling prophecy.
Bank Run Examples
There is no shortage of bank run examples throughout history, including many within the last century that hit close to home.
- Schwenk Bank Run. In 1914, Schwenk Bank was accused of funny bookkeeping in New York. Customers ran to the bank’s three branches to withdraw money. Ultimately the bank was seized by the government, and depositors got most of their money back.
- Great Depression. During the decade of the Great Depression, a whopping 9,000 banks failed. Many collapsed in large part because of bank runs, and some smaller banks were put out of business overnight. Seven billion dollars in depositor assets were lost.
- Washington Mutual. In 2008, Washington Mutual experienced a bank run in which depositors took out almost $17 billion over just two weeks. Factors included the failing housing market. Ultimately, the bank was purchased by JPMorgan Chase.
- Silicon Valley Bank. In March 2023, Silicon Valley Bank (SVB) became the third-largest bank failure in U.S. history after a $42 billion bank run. The bank had invested heavily in government bonds following the pandemic. Then, when interest rates soared, the value of those bonds decreased, and depositors were unconvinced the bank would be able to sell them back for a profit. The FDIC transferred depositors’ money to First Citizens Bank & Trust Company.
Should I Pull My Money Out of the Bank?
You can protect your money from a bank run by spreading out your deposits across multiple FDIC-insured banks or NCUA-insured credit unions. Each account will be fully insured up to $250,000. If you start to get uneasy or need to insure excess deposits, moving money to a new account with a balance under the coverage threshold could give you the peace of mind you seek.
If a bank run is in progress and you must panic, panic early. If and when regulators step in and take control of the banking institution, you may not be able to access your funds for a period of time. Depositors who have their assets transferred to a new bank have no say in where their money goes.
