Bank Runs and the FDIC
A bank run is a situation in which bank customers have a suspicion that a bank will fail and thus all try to withdraw their money from the bank. Because of the sheer amount of customers that are withdrawing money, a bank that would not have otherwise failed fails because more money is withdrawn than the bank can provide. These bank runs gained their notoriety during the time of the Great Depression because many consumers were actually losing all of their money due to bank failures. This post will attempt to understand the rationale behind bank runs and how they have been prevented today.
Essentially, bank runs derive from the fear of losing money. The fear is completely understandable because it's essentially losing all your money because of another entity's mistakes. However, this fear is blown up and exaggerated in the consumers' eyes more a multitude of reasons. A large culprit is the effect of mob mentality or following the crowd. When one person has a suspicion that causes them to withdraw their money, other people will catch on and try to save themselves from losing money. Furthermore, even the slightest bits of shakiness from a bank will raise suspicions that will cause customers to fall into this trap. Thus, banks that should not fail or wouldn't have failed end up failing, ultimately propelling the suspicion that causes bank runs.
However, this issue is not without a solution. The vast issue of bank runs prompted the US government to create some sort of protection or insurance for consumers to prevent them from withdrawing all their money randomly. An example of this is the FDIC, which is a corporation that grants customers full or partial protection of their money. Banks must be federally insured by the FDIC so that in the case it fails, customers will be protected up to $250,000 per depositor per institution. This not only solves for bank runs, but also encourages customers to open multiple bank accounts to have all their money insured.
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Nice post Andrew! It's interesting how bank runs are caused by a lack of confidence in the bank. However, with the FDIC I think that it's very unlikely for bank runs to happen again in the future. With all banks now insured, even in the event of an economic depression, the burden will fall on the FDIC and the American government, not the people. This will prevent people from panicking and allow banks to hold on to some of their money and thus recover from the depression.
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