What Is A Bank Run? Understanding What Happened At SVB Amid Potential Banking Crisis - SVB Finl Gr (NASDAQ:SIVB)

Shares of several bank stocks are trading sharply lower Monday following the recent closure of Silicon Valley Bank SIVB and Signature Bank SBNY, the largest bank failures since 2008.

Benzinga reported Sunday that U.S. regulators have taken decisive action to safeguard the country’s banking system by shutting down New York-based Signature Bank, becoming the third financial institution to be shuttered after the collapse of Silicon Valley Bank and Silvergate Capital Corp SI.

The move aims to ensure public confidence in the banking system, protect deposits and provide access to credit to households and businesses, promoting strong and sustainable economic growth.

Amid broader industry uncertainty, our Benzinga team decided to explore the currently trending term – “bank run.”

What Is A Bank Run?

A bank run is an event that occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency. It is also known as a run on the bank.

Bank runs can cause a financial crisis, as they can force the institution to liquidate assets at fire sale prices to meet withdrawal demands, which in turn can lead to losses for depositors and other creditors.

A bank run is usually precipitated by a widespread belief that the bank is, or might become, insolvent. As more people withdraw their deposits, the likelihood of default increases, prompting more people to withdraw their deposits.

This can quickly escalate into a cascade of withdrawal requests that the bank is unable to fulfill. Although some of the depositors may be rational, the collective behavior of the depositors can be irrational and can result in the bank’s insolvency.

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Bank runs across the world have not been uncommon throughout history, particularly in countries with weak banking systems and/or a lack of government regulation. Bank runs can occur as a result of a variety of factors, including economic downturns, rumors of insolvency or fraud.

In the United States, the most famous bank run occurred in 1933 during the Great Depression. In the modern era, bank runs are less common due to increased regulation, deposit insurance, and the ability of the Federal Reserve to act as a lender of last resort.

However, bank runs still occur in some countries, particularly those with weak banking systems or poor oversight. In addition, bank runs can occur as a result of cyberattacks, as was the case with the 2016 Bangladesh Bank heist.

To prevent runs on banks, governments and central banks have implemented a variety of measures. These include deposit insurance, capital requirements, and liquidity requirements that limit the amount of withdrawals a bank can make in a given time period. Banks also use a variety of risk management tools, such as stress tests, to help identify potential risks that could lead to a bank run.

Now Read: Banking Volatility Spills Over Into Oil Market: What Investors Need To Know

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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