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A bank run occurs when a large number of a bank’s customers withdraw their money from a particular financial institution at the same time. Although bank runs are generally uncommon today, one notable bank run occurred in March 2023, when Silicon Valley Bank had 25% of its deposits withdrawn in a single day; the bank was closed by California regulators before another 62% of deposits was scheduled to be withdrawn the next day.
Read on to learn what can trigger a run on a bank, which bank runs have made history, and how bank deposits are protected.
Key Points
• Bank runs happen when a large number of a bank’s customers withdraw their deposits at the same time.
• Fear and panic can trigger a run on a bank if customers worry that their financial institution will run out of money or collapse.
• Silent bank runs happen when customers withdraw their deposits electronically, such as through ACH transfers or wire transfers, rather than in person.
• In the rare event that a bank fails, the FDIC or state regulators step in and either find another financial institution to take over the bank or close it down.
• FDIC coverage insures deposits of up to $250,000 per insured bank, per depositor, per account ownership category if a bank fails.
What Is the Definition of a Bank Run?
A bank run is “when a large number of depositors simultaneously withdraw their deposits from a bank due to fears that the bank might fail,” according to the official definition used by the Federal Deposit Insurance Corporation (FDIC).
The Mechanics Behind a Run on a Bank
A bank run is typically caused by a chain of events:
• An event — such as negative press about a bank or rumors about its liquidity — leads to fear or concern about the solvency or stability of the bank.
• Customers begin to panic and many rush to withdraw their money from the bank, either in person or electronically.
• If too many customers try to withdraw their money simultaneously, the bank’s cash reserves may dwindle, which may lead the bank to attempt to borrow money from another bank.
• If the bank can’t recover quickly enough or raise enough cash to cover transactions, regulators may step in and take control of the bank.
A bank run may cause a financial institution to collapse if the bank’s cash reserves can’t cover the withdrawals. The Federal Reserve set reserve requirements for banks at 0% in 2020 during the Covid-19 pandemic, which means that banks are technically not required to keep cash at branches. Banks do generally keep some cash on hand to cover daily transactions, but the majority of the funds bank customers deposit is used to fund loans and investments. A portion is also usually deposited at one of the nation’s central banks.
The bottom line is that when a bank run happens, the bank’s cash reserves may be depleted quickly, disrupting operations temporarily or permanently.
Silent Bank Runs Explained
A silent bank run occurs when customers use electronic means to withdraw funds, rather than going to the bank and withdrawing cash. For example, customers might use ACH transfers or wire transfers to pull their money out of a bank without ever setting foot inside the bank.
A silent bank run may be more damaging than a traditional bank run because of the speed at which it can occur via digital or mobile banking. Wire transfers, for instance, can be completed in just minutes. A large-scale silent bank run might take a bank’s assets down in the course of a few hours, rather than several days.
Common Causes of Bank Runs
Bank runs typically happen because people panic. Different factors can drive that panic and lead to a bank run. For example, customers might move to withdraw their funds from their savings account or checking account if:
• Questions arise about a bank’s financial health after a much lower-than-expected earnings report.
• A news story implicates a bank in fraudulent or criminal activity.
• Rumors spread on social media about a bank’s liquidity or operations.
• Increased volatility in the stock market or a decline in the value of the dollar lead consumers to believe they need to withdraw their cash ahead of an economic crisis.
Bank runs can affect a single bank or many banks at the same time. Sometimes a domino effect happens, where one bank is targeted for a run and it impacts other banks. For example, the collapse of Silicon Valley Bank sparked runs at Signature Bank and First Republic Bank, leading to a drawdown of each bank’s assets by 20% and 57%, respectively.
Customer sentiment, or the way people feel about their money’s safety within the banking system, plays a big part in driving behavior like a bank run. When panic sets in, a herd mentality may take over, causing people to make spur-of-the-moment financial decisions.
Notable Historical Bank Runs
The Federal Reserve compiles information on bank runs, noting the size and speed with which they occur. Below are some of the most significant bank runs based on the percentage of assets withdrawn and how quickly the withdrawals occurred.
| Bank Name | Starting Date | Total Outflow | Bank Run Duration |
|---|---|---|---|
| Continental Illinois | May 7, 1984 | 30% | 10 days (7 business days) |
| Washington Mutual | September 8, 2008 | 10.1% | 16 days (12 business days) |
| Wachovia | September 15, 2008 | 4.4% | 19 days (15 business days) |
| Silvergate | 2022 Q4 | 52% | Possibly 7 days or less |
| Silicon Valley Bank | March 9, 2023 | 25% | 1 day |
| Signature Bank | March 10, 2023 | 20% | 1 day |
| First Republic | March 10, 2023 | 57% | 7-14 days (5-10 business days) |
What’s noteworthy about the Silicon Valley Bank collapse is how quickly it occurred and the volume of assets withdrawn. It was deemed a “lightning bank run” in the press because billions of assets were withdrawn in a matter of hours.
Strategies for Bank Run Prevention
Several federal agencies work together to prevent bank runs and minimize the impacts of bank runs when they do occur. The FDIC is a key player, along with the Federal Reserve and the Office of the Comptroller of the Currency (OCC). State regulators also have a part in protecting consumers against bank runs.
How the FDIC Protects Your Money
The FDIC works to safeguard your money in the rare event of a bank failure by insuring deposits. FDIC insurance covers up to $250,000 per bank, per depositor, per account ownership type. This limit applies at every bank you have accounts with, as long as the bank is an FDIC member.
The National Credit Union Administration (NCUA) offers similar coverage for deposit accounts held at credit unions, which is one of the differences between FDIC and NCUA insurance.
In the rare event that a bank fails, the FDIC steps in to take control of the bank, closing it for further business. The closure may be temporary if the FDIC can find another financial institution to take over the bank. If not, the closure is permanent. During the takeover process, customers will not be able to access funds in their account.
Depending on how the FDIC handles the closure, insured deposits will either be moved to a new account at a different bank or mailed to bank customers via a paper check. This typically happens quickly, within one to two business days.
Keep in mind as you’re managing your money that any amounts in a bank that are over the $250,000 insured limit may be at risk. You might be able to get the rest of your money back by filing a claim, but that could take time and there are no guarantees.
How to Keep Your Bank Deposits Safe
Putting money in an FDIC-member traditional bank or online bank and observing the coverage limits is one of the best ways to keep bank deposits safe. If you have more than $250,000 in deposits, you could move some of that money to a different FDIC-member bank so that it is insured. You can follow the same rules for NCUA coverage if you have accounts at a credit union.
Some banks participate in programs that insure excess deposits by offering a higher FDIC coverage limit. For individuals that want to keep large sums on deposit this may be an option to consider.
For example, with SoFi, you could maximize your FDIC insurance through the Insured Deposit Program. This program boosts FDIC coverage limit up to $3 million via a network of participating banks.
The Takeaway
Bank runs are generally uncommon, and increased regulation helps protect consumers against financial losses in the rare event that a bank fails. Understanding what drives bank runs, knowing about FDIC protection, and learning ways to help safeguard your money, can be useful when choosing where to stash your savings.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What does a run on a bank mean for my personal savings?
A bank run might affect your personal savings if you have deposits that are not insured by the Federal Deposit Insurance Corporation (FDIC). Deposits are fully protected up to $250,000 per participating financial institution, per depositor, per account ownership type, so if you maintain balances below that amount in an FDIC-member bank, a bank run may have minimal personal impact.
Are bank runs still possible today?
Bank runs are less common today than they were a century ago thanks to increased regulation, but they can still happen. One of the most notable bank runs in history occurred in 2023 when Silicon Valley Bank saw a 25% outflow of assets in a single day. Economic conditions and consumer sentiment may influence if and when a bank run occurs.
How much money does the FDIC insure if my bank fails?
The FDIC insures deposits up to $250,000 per depositor, per account ownership type, per bank. If your bank fails, anything up to that amount is generally covered. Amounts over the $250,000 limit may still be recovered, though you’ll likely need to file a claim to get your money back if the bank is dissolved, and reimbursement isn’t always guaranteed.
Can I withdraw all my cash during a bank run?
You can withdraw cash during a bank run up to the amount the bank has on hand. If the bank runs out of money or the FDIC or state regulators take over the bank, withdrawals will typically be halted. But your money will be insured up to $250,000 per bank, per depositor, per account ownership type, if you belong to an FDIC-member bank.
What is the difference between a bank run and a bank failure?
A bank run is when many bank customers withdraw their money from their accounts at the same time. A bank failure happens when a bank collapses and the FDIC or state regulators step in to take control. A bank failure may follow a bank run if the bank isn’t able to borrow cash to cover the withdrawals and can no longer pay out money to its customers.
Photo credit: iStock/Nikola Stojadinovic
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