Tuesday 21st of May 2019

What is a Bank Run?

Bank runs are not exactly everyday occurrences. The last time a bank run happened in the U.S. was probably during the Great Depression. However, in England, Northern Bank recently experienced an unsettling bank run. Hundreds of frantic depositors lined up at the branches to withdraw their money. Propelled by fears that the subprime-mortgage crisis would obliterate their savings, the depositors ended up withdrawing about $6 billion from the institution. This amounted to one-eighth of the institution’s total deposits. The run showed no signs of waning until the British government stepped in to allay the depositors’ fears about the security of their money. So how likely is this to happen in the U.S.? In this post, we’ll address that question and the issues surrounding it.

Not Just Our Problem

The mortgage crisis is not limited to the United States. The United Kingdom and Spain, two countries with red-hot real estate markets, have experienced a similar phenomenon. Mortgages are commonly issued for 100%-125% of a home’s value, which is a perilous situation if home prices fall, and this is exactly what has happened in the U.S.and the U.K. Mortgage loans are issued to homebuyers who never had the requisite financial security to make good on such a massive commitment.

Over-Lending

An organization that originates a mortgage can sell it off usually in just a few weeks, regain the capital, and then, after freeing up the capital, originate a new mortgage. This method is largely responsible for its own demise because it compels institutions to lend faster and faster. The more money that is issued in mortgages, the more mortgages the lender can sell or securitize. The more money the lender can free up for new mortgages, the more mortgage loans they can write, and the cycle continues on and on. Growth in deposits can’t keep pace with the growth in the lender’s mortgage portfolio, so the organization’s leverage grows and grows.

Red Flags That Your Bank Is Unsafe

If you are concerned that your money is not safe with your institution, you should look for these red flags before you do a run. Here are a few of the warning signs that your institution may be in trouble:

  • It has a large mortgage portfolio and a small deposit base. Deposits have to keep up with mortgage books if the bank is to stay afloat.
  • It gets the majority of its money from capital markets. The bank should raise less than 50% of its money from these sources.
  • The organization isn’t too big to fail. Usually, larger institutions aren’t as vulnerable to failure as smaller ones. If you do business with a small organization, use the size to your advantage by taking the time to talk to an officer or representative about your concerns.