These are very unique times, and I hope everyone is staying safe. I will be posting several articles on the recent volatility out there including an overview of the recent stock market declines, what the Fed is doing to try and stop it, and a few similar articles over the next few days. I wanted my first article to be an overview of what is a run on the bank and what kind of impact it can have on the banking industry and the overall commentary. Please feel free to ask any question you have in the comments section below.
A bank run happens when a large number of customers go to the bank and all withdraw their deposits at the same time. The reason the customers go to the bank to withdraw their money is because they fear that bank or financial institution will run out of money. So in theory, they want to be the first ones to get their money out. A bank run is typically the result of panic rather than true insolvency by the bank.
If all the customers withdrawal their money at once, the bank will typically to be forced to sell off long-term assets at discounted prices. This creates pressure on the bank that may lead it to insolvency. Bank runs don’t happen very often, but they were a notable feature during the financial crises that brought down large financial institutions, such as Lehman Brothers. Now given all of the volatility and stock market decline, there are some that are predicting some banks could face some financial pressure if people begin to pull their money out. I think it should be important to note that most banks and financial institutions have FDIC insurance. At a high-level, the depositor or customer has federal protection for up to $250,000.
Overall, bank runs are a scary prospect that can lead to failures to the total economy. I think the consumer should not overly panic and create a bank run if you don’t have to. Make sure you review what kind of FDIC insurance you have and if you are below the threshold, there is no need to take out all of your money.