Bank runs

A sound bank can fall within hours. Not because it lost money, but because everyone wants their money at the same time.

A bank's secret fits in one sentence: your deposit is not in a vault. It has been lent out.

Say a bank with one hundred euros of deposits. It keeps ten euros in cash, and lends the other ninety.

On a normal day, a few customers withdraw a little. Ten euros is plenty.

But if more than one customer in ten wants to leave on the same day, the till is empty. The loans will not come back for years.

That is the trap. If you think others will withdraw, you are right to run first.

The last in the queue risks getting nothing back. So nobody wants to be last.

Fear is enough. A rumour can bring down a bank that, without it, would have held.

September two thousand seven, in England. News breaks that the bank Northern Rock is asking the Bank of England for help.

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The next day, queues form outside its branches. People wait for hours to empty their accounts.

The website stops responding. The images loop on television, and the queue grows longer still.

The run stops when the government promises to guarantee all deposits. The bank is nationalised the following year.

March two thousand twenty-three, in California. Silicon Valley Bank announces a loss on its bonds.

Its customers are mostly young companies. Many have far more than the guaranteed amount in their accounts.

In a single day, they ask to withdraw forty-two billion dollars. No queue: by phone, in a few clicks.

The next day, the bank is closed by the authorities. The run of two thousand seven took days. This one, a few hours.

How do you stop a run? You have to remove the reason to run.

That is the idea of deposit insurance. If the bank fails, a fund repays you, up to a ceiling.

The United States created it in nineteen thirty-three, after thousands of bank failures.

If your money is guaranteed, you have no reason to be first. You stay at home.

Today in Europe, the guarantee covers one hundred thousand euros per person and per bank. In the United States, two hundred and fifty thousand dollars.

The twist: at Silicon Valley Bank, the guarantee was not enough. Most deposits were above the ceiling.

And that is what made customers run. Whatever is not guaranteed can always trigger a panic.

The lesson: below the ceiling, your deposit has nothing to fear from a run. Above it, trust becomes your only protection again.