With concerns still swirling around the U.S. banking sector, one expert said bank runs are comparable to “panic buying” that occurred in stores at the start of the coronavirus pandemic in early 2020.
“The pandemic-related corollary would be when we were all nervous, we all rushed to the store to buy toilet paper,” said Jadrian Wooten, an economics professor at Virginia Tech.
“We ended up selling the stores out of toilet paper, and then there was nothing left for anyone else,” Wooten said.
Wooten called bank runs a “self-fulfilling prophecy,” as people concerned about banks not having enough cash withdraw too much money, leading to the very problem they were worried about in the first place.
Banks don’t have enough money to give all of their depositors all of their money immediately, as everyone’s cash isn’t just sitting around.
“Banks take our savings accounts, take a percentage of that, and then loan it out to somebody in the form of maybe a mortgage,” Wooten explained. “A large portion of what you put into the bank gets loaned out to someone else.”
Depositors withdrew savings, and investors broadly sold off bank shares this month after the second- and third-largest bank failures in the nation’s history happened in the span of 48 hours.
The federal government raced to reassure Americans that the banking system was secure.
In response to the crisis, regulators guaranteed all deposits at the two banks and created a program that effectively threw a lifeline to other banks to shield them from a run on deposits.
Regulators closed California-based Silicon Valley Bank after depositors rushed to withdraw their funds all at once.
The only larger failure in U.S. banking history was the 2008 collapse of Washington Mutual. New York-based Signature Bank was seized by regulators shortly after in the country’s third-largest failure.
In both cases, the government agreed to cover deposits, even those surpassing the federally insured limit of $250,000.
Regional banks were seen as the riskiest, since they do not have the scale to compete against larger competitors. Large account balances — once seen as a positive sign that a bank’s clients are well off — were a liability since they could be withdrawn at the first sign of trouble.
Despite the lingering and widespread concerns, Wooten said he sees reason for optimism.
“While there might be some rockiness, generally speaking, governments are responding the way that we would expect them to,” Wooten said. “It makes me feel a lot more comfortable about the future.”
The Associated Press contributed to this report.
