By understanding the lessons from recent bank runs, policymakers can better safeguard the stability of the banking sector.
When Silicon Valley Bank was shut down in March 2023, 25% of its deposits has been withdrawn on March 9, and the expectation was that another 62% of deposits was to be withdrawn on March 10. The bank was expected to lose almost 90% of its deposits in two days! There haven’t been a lot of US bank runs in the last few decades, but the recent ones have been fast. Jonathan Rose discusses “Understanding the Speed and Size of Bank Runs in Historical Comparison” (Economic Synopsis: Federal Reserve Bank of St. Louis, 2023: #12).
Here’s a table from Rose to help frame the topic:
The column showing “deposit insurance coverage” is meaningful because if deposits were already covered by insurance, there is no reason for them to be withdrawn. In retrospect, the bank runs of 2008–at Wachovia and Washington Mutual–stand out on this list. At those institutions, most of the deposits were already insured, and the decline in deposits during the run was relatively small–and also took a few weeks.
In the recent examples, including Silicon Valley Bank, the share of deposits covered by deposit insurance was much lower. Instead, these banks sought to attract large deposits from particular groups, like venture-capital backed firms (Silicon Valley Bank), crypto investors (Silvergate and Signature), private equity firms (Signaure and Silicon Valley Bank), and high net worth individuals (Signature and First Republic). A bank where most of the deposits are not covered by deposit insurance is more vulnerable to runs.
In addition, it has been possible for decades now to withdraw funds from a bank very quickly: as Rose points out, the Continental Illinois bank run back in 1984 was described at the time as a “lightning fast electronic run” by big corporations pulling out their deposits. What seems different now is that a run can happen with a large number of mid-sized and smaller investors with similar concerns (like VC-backed firms or crypto investors), who are connected with each other via social media networks.
The underlying lesson here is an old one, but in a new context. Banks will seek out ways to make money, including by specializing in providing services to specific groups like VC-backed firms, crypto investors, private equity, and so on. There’s nothing wrong with a bank trying to attract customers! But when those specialized groups also provide substantial deposits to the bank, going beyond the previous deposit insurance limits, then there are risks of bank runs that cause shivers through the entire banking system. At a minimum, the bank regulators need to be aware of these risks and adapt the deposit insurance premiums for such banks accordingly. The more aggressive step would force banks to separate their provision of specialized financial services into a company separate from the actual “bank.”
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.