What Would A Bank Run Look Like Today?

Authored by Jeffrey Tucker via The Epoch Times,

The movie “It’s a Wonderful Life” (1946) features what is today the most famous bank run. It’s film and fiction, yes, but fits with a scenario that has been common for centuries. When the movie came out, the bank runs of 1930–1932 were very much in people’s memory. For older people, they remember the Panic of 1907. Before that, there was the Panic of 1893, the Panic of 1873, the Panic of 1837, and the Panic of 1819.

Panics and banking go together and have for 500 years.

It’s funny that we call them panics, as if people randomly start hurling themselves around in irrational fear. All that’s really going on is that people want their own money and ask for it. Customers grow concerned that the bank—which makes loans on deposits—has overextended and cannot make good on its redemption promises.

It’s a test that the bank passes or not. The bank run is nothing more than a rational check on the soundness of the bank. It’s not “panic” but merely a demand for one’s own property.

The bank run also serves a hugely important market function. The fear of one inspires banks toward prudence. Any attempt to suppress them invariably leads the banking system to become overextended, pushing out leverage beyond a sustainable point. When conditions change, unsound and overextended banks go belly up. This is nothing more than the market at work.

From 1913, with the establishment of the Federal Reserve, the driving ethos of banking and monetary policy has been to reduce bank runs and failures. It was to broadcast a message of confidence in the financial system so that people would no longer panic. It did not quite work, however, as evidenced by the vast bank failures of the early 1930s. President Franklin D. Roosevelt even declared a bank holiday to stop them, which didn’t work, so he turned to gold confiscation and devaluation.

All this is background to a note I just received from my own bank. It’s an update to the terms of service. Here is what it says:

“Added a new Section 8(e) (Digital Wires—Transaction Limits) to clarify that, to protect your account, online wire transaction limits may have daily or rolling 30-day restrictions and that we may establish or modify limits on the amount, frequency, or type of transactions you can initiate using our payment services, or your transaction limits may be temporarily reduced or subject to additional restrictions. Subsections following this one have been renumbered accordingly (Sections 8(f)–8(l)).”

Hardly anyone reads updates to terms of service. I’m probably in the 1 percent of customers who even clicked on the link. What it means should be obvious. My bank can restrict my access to money anytime it wants and by any amount. I might want to take it all in cash or move it to another institution. My bank has told me that this is entirely up to them. By continuing to bank with this famous institution, I have implicitly agreed to this.

To be sure, we should be grateful for banks that protect our accounts. That’s fine. What’s not fine is preventing access to money that is ours. It’s hard to know which is which, and while I would not suggest that banks would naturally lie to us, enterprises are not beyond some limited duplicity when financial survival is at stake.

Should I change banks? It’s probably pointless. Every bank, if it doesn’t have this as part of its terms of service, will adopt it anyway. You could say that this means nothing. Maybe that’s right. Or maybe the bank is just preparing for a rainy day that never comes, and so this update to the terms of service is practically meaningless. One hopes so.

But it did get me thinking: How would a bank run look today?

There will be no George Bailey rushing to the Building and Loan to calm the panicked depositors, explaining how the institution works (e.g., “Your money’s in Joe’s house”). These days, banks are not even very busy with customers. Every time I need to go to one, I walk right up to the window because no one is there. Nearly all money flows and banking services are done electronically.

I’m grateful for this change. My monthly bill-paying efforts take less than a minute. My childhood memories of my father on bill-paying day still stick with me. He had a small room off the kitchen that was his office. Once a month on Saturday, he would go inside. The kids knew not to disturb him. He had a stack of bills. He would write checks and put them in envelopes with stamps. With each bill paid, he went to his ledger and balanced the checkbook.

As he watched the family accounts drain more and more with each bill, he would grow ever more frustrated and upset. He made a salary of $14,500 and supported two kids, a wife, a home, and two cars, and we took plenty of vacations. In real terms, that’s about $114,000 today, a full household on one income. We made ends meet, but it was often a struggle, one from which he protected the family.

Our entire lives were being held by the bank.

There were never issues of trust.

I doubt that my father ever considered the possibility.

These days, money flows are throttled in every direction even without banking panics.

Venmo limits unverified weekly sending and spending to $300. Verified accounts allow up to $60,000 per week for payments to others. Outgoing bank transfers are limited to $5,000 per transfer and $20,000 per week as long as it is verified. Zelle’s limits vary by the bank: Bank of America permits $3,500 per day up to $20,000 per month. The others are the same or similar.

If you want to move real money, you have to go to ACH (automated clearinghouse) or FedWire (an improvement over old-style wiring) or get a crypto account and use a stablecoin (which moves $1.2 trillion per month, making it dominant). Regardless, it is not easy, and most depositors do not avail themselves of it.

Banks made ACH rather difficult, with pull-down menus of verified recipients. It can be extremely difficult to get serious blocks of money from here to there already. Mostly we don’t need to, so the system has not been really tested. Most people have no idea how much the system of electronic payments and withdrawals is already throttled.

As for cash, it is mostly out of the question. Your bank will give you the stare-down if you ask for $5,000 and make you fill out some law enforcement forms for $10,000. You dare not attempt to carry this kind of cash through an airport. You will be taken aside and asked to provide a full accounting for it. It’s even true for driving: If you are stopped and searched, you risk everything.

To the original question, what would a bank run look like?

It would involve millions of people simultaneously attempting to max out their withdrawals, perhaps to buy gold. It would be the raiding of ATMs until they are empty, which would take about 30 minutes. All the while, the institutions would assure you that they are fully sound and there’s nothing about which to worry.

The same would continue the next day as the banks doled out allotments as necessary and only for verified purposes. You might have a million dollars in the bank, but it would only be numbers flashing on a screen, interesting to look at but impossible to use. There is simply no way to get to it. And forget going to your branch. They would likely put up signs with the explanation that withdrawals are limited to $1,500 or so.

In other words, a serious bank run today would be a quiet and strangely uneventful financial apocalypse in which money movements would be effectively frozen. The Federal Reserve would get to work flooding the entire system with liquidity, unfreezing withdrawals even if they are still throttled. The new money flooding the system to bail out the banks would result in hyperinflation about nine to 12 months later, after which your money would have lost half its value anyway.

What could kick it off? Could be the default of a financial product. Could be the collapse in commercial real estate or a sudden plunge in artificial intelligence asset valuations. Or it could be nothing other than an online rumor that goes viral. This happened often in the 19th century: One person starts the fear, and it spreads like wildfire.

We will not likely ever see a bank run like we did in past times. That’s not a good thing. The system today provides the illusion of liquidity, but take a look beneath the surface. A genuine financial crisis—which we have somehow avoided even during these tumultuous times—would be a civilizational disaster.

This column is not intended to scare you. It might do that anyway.