In bank runs 2023, the rapidity with which customers can move their money is critical. Unlike in the past, people now have the convenience of transferring funds to other banks within moments via online banking or mobile apps. This modern capability means bank runs today can more severely impact banks than in previous years.

How Do Bank Runs Happen?

Bank runs occur when customers, driven by panic, start withdrawing their funds in mass, fearing the bank will run out of money. It's important to note that these runs are often based on fear rather than actual financial instability of the bank. However, such panic-induced withdrawals can ironically lead to a bank's economic downfall.

Banks don't keep all their deposited funds in physical form. They have a set amount in their vaults, determined by daily needs and security considerations. Additionally, banks maintain certain reserves at the country's central bank.

This practice is encouraged by programs like the Interest on Reserve Balances (IORB), where banks earn interest for keeping these reserves. In bank runs, banks have to find ways to increase their cash on hand quickly. This often involves selling assets at prices lower than their market value, which can further fuel customer concerns and accelerate the bank run.

Measures to Prevent Bank Runs

Governments, particularly following the banking crises of the 1930s, have implemented several strategies to reduce the risk of future bank runs. One significant measure is the establishment of reserve requirements.

This regulation requires banks to keep a certain percentage of deposits in physical currency. After initially being necessary, the Federal Reserve eliminated this requirement and used other monetary policy instruments.

The 1933 creation of the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits was another critical step. Multiple bank failures prompted this action. The FDIC's primary goal is to protect the US financial system's stability and confidence.

It offers insurance up to $250,000 per depositor in each recognized ownership category. This insurance has been a cornerstone in maintaining confidence in banks, even in the context of bank runs 2023.

The FDIC can extend its coverage beyond the usual limits in extraordinary situations. For instance, in the 2023 failure of Silicon Valley Bank, the FDIC used the Deposit Insurance Fund to reimburse depositors fully. Quarterly fees paid by banks support this fund.

Banks themselves also need to take proactive measures against bank runs. Temporary closures can be an option to prevent mass withdrawals. A historical example is the bank holiday declared by Franklin D. Roosevelt in 1933, intended to allow for inspections and ensure banks' solvency. This action was pivotal in allowing banks to continue operations amid a crisis.

Prominent Bank Runs

Washington Mutual's Downfall

Washington Mutual (WaMu) collapsed in 2008, the most significant US banking failure. A staggering $16.7 billion in withdrawals occurred over nine days, representing 9% of the bank's deposits. The aggressive effort, known as a bank run in 2023, brought down WaMu. The Office of Thrift Supervision closed the bank on September 25, 2008. After that, the FDIC took over.

After its collapse, JPMorgan Chase bought WaMu's banking divisions for $1.9 billion. The acquisition converted all WaMu branches into Chase branches, a significant banking industry change reminiscent of bank runs.

The Bank of United States downfall

The New York-based Bank of United States faced a crisis in 1930. Rumors caused depositors to withdraw over $2 million quickly. bank runs today, often mentioned in 2023, contributed to the bank's collapse. The bank couldn't handle the sudden fund depletion despite its acquisitions and mergers.

This event didn't just affect the Bank of United States; it sparked a chain reaction. News of its closure led to similar bank runs 2023 across the country, worsening the economic situation and contributing significantly to the onset of the Great Depression.

Bailey Building and Loan

The 1946 film "It’s a Wonderful Life" features the fictional Bailey Building and Loan. In this story, the main character, George Bailey, steps in to manage the family-owned bank after his father's sudden death. When the bank faces a crisis, with depositors rushing to withdraw their funds – a scenario that mirrors bank runs today – George and his wife, Mary, use their savings to keep the bank afloat.

This movie, though fictional, offers a dramatic portrayal of how bank runs can impact financial institutions. The situation Bailey Building and Loan faced is a classic example when discussing the concept of bank runs, even in 2023.

The Collapse of Silicon Valley Bank 2023

In March 2023, Silicon Valley Bank found itself amid a significant bank run. On March 9, the bank's situation worsened drastically when its stock prices took a nosedive.

In a state of panic, clients withdrew an astonishing $42 million, resulting in the bank's balances plummeting to a negative $958 million. This mass withdrawal was triggered by an alarming announcement from CEO Greg Becker, revealing the bank's substantial loss of nearly $2 billion in assets.

Santa Clara-based Silicon Valley Bank was closed by state regulators on March 10. This occurrence established it as the second most significant bank collapse in the annals of the United States.

The FDIC guaranteed full reimbursement to all depositors despite 94% of the bank's deposits being uninsured. On March 27, First Citizens Bank bought a large portion of a provisional bridge bank created after the crisis. This incident shows the vulnerability of financial institutions and has become a hot topic in 2023 bank run discussions.

Signature Bank's Troubles in 2023

March 2023 also saw New York's Signature Bank grappling with a severe bank run. In the wake of the collapse of Silicon Valley Bank, Signature Bank customers, driven by fear, withdrew billions of dollars. Additionally, the bank's stock value suffered a steep decline. These events were compounded by the broader anxiety stemming from the recent downfall of SVB.

Signature Bank, about $88 billion in deposits, catered mainly to legal, accounting, manufacturing, healthcare, and real estate clients. A noteworthy aspect of Signature Bank was its willingness to accept deposits in cryptocurrency. This sector has been turbulent, especially following the collapse of the crypto exchange FTX in November 2022. Notably, almost 90 percent of the bank’s deposits were uninsured.