Bank Runs Can’t Happen- Right?

By Tim McMahon, editor

Banks are considered safe.  This isn’t the Great Depression…

We have FDIC deposit insurance now so bank runs can happen right?

Even the “Urban Dictionary” equates the saying “money in the bank” with reliability.

You can wager money on what will happen, and if you have inside information and you’re 100% certain your bet is right, then your pay-off is assured; you might as well call it “money in the bank.”

As recently as 2008 there have been bank runs, perhaps even more recently as they generally aren’t widely publicized for fear of creating even more bank runs . Whenever people loose confidence in the system to protect them (or even delay their access to their money) there will be bank runs.

Washington Mutual Bank (WaMu) was the largest Savings and Loan in the United States but on September 15, 2008 it received a credit rating agency downgrade.  In the next nine days WaMu customers withdrew $16.7 billion in deposits,  which was definitely a bank run by any definition. This led the Office of Thrift Supervision (a division of the U.S. Treasury)  to close the bank and sell it to JP Morgan Chase. In October 2008, Wachovia Bank faced a “silent run” as its stock plunged 27 percent.

The FDIC maintains a list of “problem banks” and although it doesn’t specify which banks are on the list for fear of creating a run on those banks it does publish the number of banks on the list. Back in 2007 there were 90 problem banks.  In 2010 the FDIC actually took over 157 banks. As of the May 2011 release we can that the mortgage crisis has taken its toll and there are now 888 banks on the list.  The problem with the FDIC taking over banks is that it merges them with healthy banks. So if you take a bad bank and merge it with a good bank you get an average bank. So the merging of 157 banks into the remaining banks makes the entire system less safe. Theoretically this can continue to happen until all the banks are worthless. In the following article by Elliottwave International you can see how to protect yourself, find a safe bank and know the warning signs to look for.

Bank failures still dominate headlines as the number of failing banks continues at an alarming pace in 2011.

So far in June Atlantic Bank and Trust, Charleston, SC failed. That is on top of  5 banks in May,  14 banks in April, 3 in March, 12 in February and 11 in January for a grand total of 46 so far this year significantly higher than the entire year of 2008 when 25 banks failed. But lower than the 74 banks which had failed by this time last year.  With housing prices still low banks are slowing their foreclosure process increasing the number of problem loans on their books.

See the article:  Take Advantage of Longer Foreclosure Times on Your Family Finances.

The following excerpt from Elliott Wave International’s free report, Discover the Top 100 Safest U.S. Banks, explains the true risk that you may face when a bank fails.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised.

A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone…

The U.S. government’s Federal Deposit Insurance Corporation guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.

If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s all that it is.

So what can you do to safeguard your money?

Read the free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn:

  • The 5 major danger signals to watch for at your bank that may signal a danger to your money.
  • The top two safest banks in your state.
  • Plus get  Bob Prechter’s recommendations for finding a safe bank.

Download your free report  Discover the Top 100 Safest U.S. Banks .

One of my personal favorite banks is Everbank they don’t make risky home loans or have lots of money tied up in local branch buildings and they have earned a 4 star  rating from Bank Rate’s Safe and Sound rating system. They also provide many services only available at fancy European boutique banks. Plus all their business is done online so you can access your account from anywhere.

For more information see the article  Online Bank Best For Term Deposits?

See Also:

So Long, US Dollar As World’s Reserve Currency

Was the AIG Bailout a Scam?

Is Bernanke Stuck in a Housing Time Warp?

The Fed’s sole purpose: keeping the banks afloat

Trends: Gold Buying to Resume & FED to Double Balance Sheet Again

Interview with David Stockman

Resources from Amazon:

End the Fed

The Case Against the Fed

The Creature from Jekyll Island: A Second Look at the Federal Reserve

The Secrets of the Federal Reserve

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About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+

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