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Bank runs were featured prominently in the news following the failures of Silicon Valley Bank (SVB) and Signature Bank, which constituted the second and third largest bank failures of all time. News coverage regarding the troubled banks prior to their being seized by regulators led to panic among customers, many of whom rushed to withdraw their money en masse.
Here we’ll go over the definition of a bank run and give examples of historic bank runs, including one famous fictional bank run.
What is a bank run?
A bank run is when a large number of a bank’s customers hurry to withdraw their deposits simultaneously because they believe the bank may fail. A bank run may happen if bank officials state the institution is having financial difficulties or if such information is reported by news outlets or on social media.
A modern-day bank run can potentially be more harmful to a bank than in past generations since the moving of money is quicker and easier in today’s digital age. In addition to visiting a bank branch to withdraw money, today’s customers can transfer their money to another bank in seconds on the bank’s website or through its mobile app.
What causes a bank run?
While bank runs are often fueled by panic rather than the bank being insolvent, people withdrawing their funds en masse could contribute to the bank’s liabilities becoming greater than its assets — which could result in collapse.
The Federal Deposit Insurance Corporation (FDIC) is a government agency created in 1933 to help reduce the likelihood of bank runs. Its purpose is to protect customers when banks fail and are forced to close their doors. The agency guarantees money is safe by insuring up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
While no depositor has lost a penny of FDIC-insured funds since the agency was established, bank runs still happen from time to time.
Notable bank runs
Silicon Valley Bank
Silicon Valley Bank experienced a run on deposits on March 9, 2023, when stock prices plummeted and customers withdrew $42 million from the bank, leaving it with a negative balance of $958 million. The rush to withdraw funds occurred after CEO Greg Becker announced the bank had lost nearly $2 billion in assets.
The Santa Clara, California-based bank was closed by state regulators the following day, marking the second largest bank failure in U.S. history. Although most of the bank’s deposits (94 percent) were uninsured, the FDIC covered all of the deposits. A temporary bridge bank was created, much of which was then acquired by First Citizens Bank on March 27.
In March 2023, New York-based Signature Bank saw a run on deposits when customers withdrew billions in funds. What’s more, the bank’s stock also experienced a sharp decrease in value. These events were spurred in part by panic over the recent collapse of SVB. Signature was shuttered by regulators on Sunday, March 12, just two days after SVB’s seizure.
The majority of deposits held at Signature Bank were from law firms, accounting firms and manufacturers as well as healthcare and real estate companies. Nearly nine-tenths of the bank’s roughly $88 billion in deposits were uninsured, The bank was one of few to accept deposits in the form of cryptocurrency, which has been in a tailspin fueled by the collapse of crypto exchange FTX in November 2022.
Like with SVB, all deposits of the failed Signature Bank — both insured and uninsured — would be made whole, according to the FDIC. The agency transferred the bank’s deposits and assets into the newly formed Signature Bridge Bank.
The collapse of Washington Mutual (WaMu) in the fall of 2008 marked the largest bank failure in U.S. history. During a nine-day bank run leading up to WaMu’s collapse, customers withdrew $16.7 billion in deposits, or around 9 percent of deposits held by the bank. The bank was closed by the Office of Thrift Supervision on Sept. 25, 2008, and placed into receivership with the FDIC.
WaMu banking subsidiaries were subsequently sold to JPMorgan Chase for $1.9 billion, and WaMu branches were converted to Chase branches.
Bank of United States
The failure of New York-based Bank of United States in 1930 was triggered by a run on deposits, which has been described as the bank run that helped create the Great Depression. The bank had acquired other banks and been through multiple mergers, but days after a failed merger in December 1930, thousands of customers gathered at one of the bank’s branches and withdrew more than $2 million in deposits. Several smaller runs ensued at the bank’s other branches. This put the bank into a liquidity crisis, causing the New York superintendent of banking to close the institution.
News of the bank’s collapse spurred runs on deposits at other banks around the country. In all, a series of crises among commercial banks turned the recession at that time into the Great Depression.
Bailey Building and Loan
In the 1946 fictional movie “It’s a Wonderful Life,” actor James Stewart plays the role of George Bailey, who forgoes his dream of traveling the world to take control of the family bank, Bailey Building and Loan, when his father dies suddenly. When a run takes place on the bank, George and his wife, Mary, use their personal savings to keep the bank solvent.
Ways to keep your money safe in the bank
If you’re wondering whether your money is safer under your mattress than in a bank, consider the significant drawbacks of keeping your funds at your home. For instance, you could lose all the money in the event of a fire or theft — in which case there’s no guarantee you’ll be able to recover the funds, unlike money that’s kept in an FDIC-insured bank. What’s more, money in a high-yield savings account earns interest, while cash kept in your home earns none.
Even if your bank were to experience a run on deposits, your money would remain safe as long as the bank is FDIC insured and your money is within the FDIC’s limits and guidelines.
Similarly, credit unions have their own federal deposit insurance through the National Credit Union Share Insurance Fund (NCUSIF), which is administered by the National Credit Union Administration (NCUA). Like FDIC insurance, this insurance carries a $250,000 cap for each account and owner.
If you’re a big saver and are concerned about having more money than is within federal insurance limits and guidelines, you might consider keeping a portion of your funds in a separate FDIC-insured bank.