What Is a Bank Run?

A bank run occurs when a large number of depositors simultaneously withdraw their money from a bank due to fears that the institution might collapse. This panic can cause a financial institution to spiral into a monetary crisis, as banks typically do not keep all depositors’ cash on hand. Instead, most of the cash is invested in profit-making products like loans, mortgages, and bonds.

What Causes a Bank Run?

Several factors can trigger or exacerbate a bank run, even if the financial institution is not on the brink of failure. Here are five key factors:

Fear

Fear is perhaps the most significant driver of a bank run. When customers believe a financial institution is in trouble, they may rush to withdraw their money, causing a ripple effect of panic and withdrawal demands.

Social Media

Speculation and rumors on social media platforms can amplify concerns about the health of a financial institution. For example, messages on social media contributed to the 2023 bank run at Silicon Valley Bank (SVB).

Technology

While technology itself doesn’t cause bank runs, it can accelerate them. Customers can quickly transfer funds electronically, as seen during the SVB crisis, where electronic transfers exacerbated the situation.

Bank Mismanagement

Mismanagement can also play a role. For instance, Washington Mutual Bank’s (WaMu) high-risk mortgage bets contributed to a bank run that led to its failure in 2008.

Economic Conditions

Economic downturns can trigger bank runs. For example, tech startups, which were major customers of SVB, faced funding issues and withdrew their deposits, leading to a significant bank run.

Notable Examples of Bank Runs

Throughout history, the U.S. has experienced several high-profile bank runs. Here are four notable examples:

Silicon Valley Bank

Date started: March 9, 2023
Cause: Tech companies rushed to withdraw cash after SVB sought to raise more than $2 billion in fresh capital
Amount withdrawn: $42 billion
Date bank closed: March 10, 2023
Buyer of assets: First Citizens BancShares

Signature Bank

Date started: March 10, 2023
Cause: Customers were scared by the sudden collapse of SVB and the bank’s heavy reliance on cryptocurrency-related assets
Amount withdrawn: $18.6 billion
Date bank closed: March 12, 2023
Buyer of assets: Flagstar Bank

Washington Mutual Bank

Date started: September 8, 2008
Cause: Economic slump and bad news from Wall Street during the Great Recession
Amount withdrawn: $16.7 billion
Date bank closed: September 25, 2008
Buyer of assets: JPMorgan Chase

Bank of United States

Date started: December 10, 1930
Cause: Collapse of a planned bank merger during the Great Depression
Amount withdrawn: More than $2 million (about $36 billion in 2023 dollars)
Date bank closed: December 11, 1930. The bank’s failure caused widespread distrust in the U.S. banking system, leading to hundreds of subsequent bank runs.

Should I Withdraw My Money During a Bank Run?

Generally, it is advisable to keep your money in the bank during a bank run rather than withdrawing it. Most bank deposits are federally insured up to a certain amount, providing a safety net for depositors.

The Federal Deposit Insurance Corp. (FDIC) insures eligible deposits up to $250,000 per depositor, per insured bank, for each account ownership category. This includes checking accounts, savings accounts, certificates of deposit (CDs), and money market accounts. Credit unions are insured by the National Credit Union Administration (NCUA) up to the same amount.

To minimize potential losses, ensure your accounts are with FDIC- or NCUA-insured institutions and that your deposits do not exceed the insurance limits.

The Bottom Line

While bank runs can be alarming, they are relatively rare today due to federal insurance of deposits. This insurance has bolstered customer confidence, reducing the likelihood of widespread bank runs like those seen during the Great Depression.

If you have any concerns about your financial situation or need mortgage services, O1ne Mortgage is here to help. Contact us at 213-732-3074 for expert advice and assistance with all your mortgage needs.