Bank runs are a longstanding problem that has plagued traditional banking for centuries. While the recent spate of crypto-related failures has brought this issue back into the spotlight, it’s important to remember that bank runs are not a new problem. Traditional banks have been vulnerable to bank runs since they first came into existence, and history is rife with examples of the devastation they can cause.
What’s a bank run?
A bank run occurs when a large nummer of customers attempt to withdraw their funds from a bank all at once. This can happen for a variety of reasons, but the most common cause is concern about the bank’s financial stability. If enough customers withdraw their funds, the bank may not have enough cash on hand to meet the demand, leading to a potential collapse.
Why do bank runs happen?
One of the primary reasons traditional banks are susceptible to bank runs is because of fractional reserve banking. This is a system in which banks lend out more money than they actually have on hand, with the expectation that not all customers will want to withdraw their funds at the same time. While this approach can be profitable for banks, it also exposes them to significant risk if too many customers try to withdraw their funds at once.
How common are bank runs?
There are numerous examples of bank runs in traditional banks throughout history. One of the most infamous occurred during the Great Depression in the United States, when over 4,000 banks failed and depositors lost their savings. 4,000! The panic was triggered by a combination of factors, including a stock market crash, a wave of bank failures, and a general loss of confidence in the banking system. People began withdrawing their money from banks en masse, leading to a vicious cycle of bank runs and further failures.
There have also been recent examples of bank runs in traditional banks across the globe, including in Sweden, China, Bulgaria, Canada, the United Kingdom, and the Czech Republic.
These incidents demonstrate that bank runs are not just a problem in the crypto world, but also a long-standing issue that has affected traditional banking for centuries.
March 2023, What happened to Silicon Valley Bank?
It’s been a tumultuous time for Silicon Valley Bank (SVB). The bank had been experiencing a surge in deposits thanks to the impact of COVID-19 on the science and technology industry, with deposits growing from $62 billion in March 2020 to $124 billion in March 2021. However, this success was short-lived. As interest rates rose during the 2021-2023 inflation surge, the long-term Treasury bonds in which SVB invested most of these deposits became less attractive, resulting in unrealized losses of over $15 billion by December 31, 2022.
Unfortunately, the situation only worsened from there. Startup companies, who had been withdrawing deposits from SVB to fund their operations as private financing became harder to come by, only added to the bank’s woes. In a bid to raise the necessary cash to fund the withdrawals, the bank was forced to sell all of its available-for-sale securities, leading to a loss of $1.8 billion.
Sadly, the bank’s fortunes took a turn for the worse, and on March 10, 2023, it failed after a bank run, marking the largest bank failure since the 2007–2008 financial crisis and the second-largest in U.S. history.
What does the crypto space think?
Crypto experts and investors blamed the outdated structures of the finance industry for causing the collapse of Silicon Valley Bank. The rapid spread of social media also came under fire, with some venture investors says it can be a catalyst for bank runs. Others experts blame government’s economic policies or the bank’s management.
I would say that the collapse of Silicon Valley Bank is viewed as a prime example of why the financial system is in dire need of decentralization.
Decades of banking crisis, have exposed the flaws of a centralized financial system and inspired the creation of Bitcoin.
In a centralized banking system, a bank run can occur when many depositors try to withdraw their money at the same time, causing the bank to become insolvent and potentially triggering a wider financial crisis. In a decentralized system, however, the risk of a bank run is reduced because the assets and liabilities are distributed across the network, making it less likely for a single institution to become overwhelmed.