Bank Runs, Now & Then

Posted March 12, 2023 by Ben Carlson

Silicon Valley Bank, the 16th biggest bank in the country, was closed on Friday. It was the second-biggest bank failure in U.S. history.  As recently as November 2021, the market cap of the company was more than $44 billion. That equity is now essentially worthless.

There is a lot to this story but it really boils down to an old-fashioned bank run. A flood of withdrawals from depositors destroyed the bank.  If everyone with a Planet Fitness membership showed up at the gym at the exact same time there would be chaos at the squat racks. It would be impossible for anyone to work out and the gym model wouldn’t work.

The same thing applies to banks. If everyone goes to get their money out on the same day, it’s going to be hard for a bank to survive.

There could be plenty of different ways this plays out but I find myself captivated by the process of a bank run.

The SVB ordeal caused me to revisit my old copy of The Panic of 1907 by Robert Bruner and Sean Carr.

It’s a wonderful account of one of the biggest and most influential financial crises in history.

The Panic of 1907 would probably be more famous if it wasn’t overshadowed by the Great Depression just a couple of decades later.

It lasted 15 months and saw GDP decline an estimated 30% (even more than the Great Depression).

Commodity prices crashed. Bankruptcies exploded. The stock market fell 50%. Industrial production dropped by more than at any time in history up to that point. The unemployment rate went from 2.8% to 8%.

Trust in the financial system went out the window as banks failed left and right. In October and November of 1907 alone, 25 banks and 17 trust companies went under.

John Pierpont Morgan more or less single-handedly saved the U.S. banking system by being a one-man central bank when none existed at the time.

He not only bullied the other banks into putting money in the system to save many of the failing banks but helped slow the pace of bank runs by instructing bank tellers to count out money as slowly as possible to stem the tide of withdrawals (it actually worked).

The banking system is more electronic today so that strategy wouldn’t work anymore. There was a financial institution in 1907 that experienced a “silent” bank run that took place over the course of 4 months.

Silicon Valley Bank basically went under in 24-48 hours once word spread that they might be in trouble.

The free flow of information today is one of the biggest differences between now and the Panic of 1907. There was also no Federal Reserve of FDIC insurance back then.

I’m not banking on a system-wide calamity the likes of 1907 this time around (fingers crossed) but there are some psychological similarities between the bank runs of the early 20th century and what we saw this week.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2023/03/bank-runs-now-then/