This Is What Happens When Everyone Panics and Pulls Money Out of the Banks
Last month , the collapse of Silicon Valley Bank (SVB) was the second-biggest bank failure in US history . News of bank failures naturally causes anxiety among banking customers around the world, so you might be wondering what happens if you pull all your money out of the bank completely, and what happens if a group of people share the same opinion. The result will be what is known as a bank run. In fact, the failure of the SVB was caused by just such a run on the bank.
What is a bank run?
A bank run is what happens when a large group of customers run to their bank (either physically or online) to withdraw their money out of fear that the bank will collapse. When enough depositors do this at the same time, the bank will use up its cash reserves and collapse.
A run on banks driven by fear of insolvency can push a bank into virtual insolvency and then default. In other words, running out of banks is a bit of a Catch-22: Fear of failure is what causes failure.
Should I be worried about a bank run?
Most banks have a limited supply of cash that they keep in their vaults on a daily basis for security and necessity reasons. On the other hand, banks should maintain a minimum amount of cash reserves in order to minimize the risks associated with bank foreclosures.
Cash reserve requirements are not the only safeguard against bank runs. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 after the stock market crash of 1929 to ensure economic stability and public confidence in the US financial system. And as we recently mentioned , the FDIC provides $250,000 per depositor insurance, which means your deposits will be protected up to that amount.
What to do if you are nervous about banks
Going to banks and withdrawing all the cash is not a long term solution. So what can you do as an individual client? Unfortunately, it’s nearly impossible to predict if your bank is going to fail. Some small steps you can take are to keep Google up to date with your bank in case there is news about it, and also stay on top of your bank’s stock price.
If you take one thing away today, let it be peace of mind: if you have less than $250,000 in your FDIC-insured US bank account, you don’t have to live in a constant state of panic. Reduce the risk of losing money in a bank failure by keeping your accounts within the FDIC insured limit. And if you have more than $250,000 in liquid assets, split your funds into different FDIC-insured accounts. And if you have more than $250,000 in liquid assets, I’m always looking for someone to invite me to dinner.