Tag Archives: Bank Runs

Bank Runs. The First Sign The Fed “Broke Something.” By Lance Roberts

Posted on March 14, 2023 | Leave a comment

Bank runs are an ever lurking possibility in a fractional reserve banking system. From Lance Roberts at realinvestmentadvice.com:

With the collapse of Silicon Valley Bank, questions of potential “bank runs” spread among regional banks.

“Bank runs” are problematic in today’s financial system due to fractional reserve banking. Under this system, only a fraction of a bank’s deposits must be available for withdrawal. In this system, banks only keep a specific amount of cash on hand and create loans from deposits it receives.

Reserve banking is not problematic as long as everyone remains calm. As I noted in the “Stability Instability Paradox:”

The “stability/instability paradox” assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push “the big red button.“

In this case, the “big red button” is a “bank run.”

Banks have a continual inflow of deposits which it then creates loans against. The bank monitors its assets, deposits, and liabilities closely to maintain solvency and meet Federal capital and reserve requirements. Banks have minimal risk of insolvency in a normal environment as there are always enough deposit flows to cover withdrawal requests.

However, in a “bank run,” many customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting a further withdrawal of deposits. Eventually, the bank’s reserves are insufficient to cover the withdrawals leading to failure.

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What Will Happen When Banks Go Bust? Bank Runs, Bail-Ins and Systemic Risk, by Ellen Brown

Posted on March 11, 2023 | Leave a comment

When there’s not enough money to go around, how the pain is shared. From Ellen Brown at unz.com:

Financial podcasts have been featuring ominous headlines lately along the lines of “Your Bank Can Legally Seize Your Money” and “Banks Can STEAL Your Money?! Here’s How!” The reference is to “bail-ins:” the provision under the 2010 Dodd-Frank Act allowing Systemically Important Financial Institutions (SIFIs, basically the biggest banks) to bail in or expropriate their creditors’ money in the event of insolvency. The problem is that depositors are classed as “creditors.” So how big is the risk to your deposit account? Part I of this two part article will review the bail-in issue. Part II will look at the derivatives risk that could trigger the next global financial crisis.

From Bailouts to Bail-Ins

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors, through an “orderly resolution” plan known as a “bail-in.”

The point of an orderly resolution under the Act is not to make depositors and other creditors whole. It is to prevent a systemwide disorderly resolution of the sort that followed the Lehman Brothers bankruptcy in 2008. Under the old liquidation rules, an insolvent bank was actually “liquidated”—its assets were sold off to repay depositors and creditors.

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The Bank-Run Phenomenon, by Jacob G. Hornberger

Posted on November 30, 2022 | Leave a comment

A prediction: within the next three years we’ll see substantial bank runs in the U.S. and other countries. From Jacob G. Hornberger at fff.org:

One of the most fascinating phenomena in financial crises is that of bank runs. That’s when panicked depositors rush to their bank to withdraw their money because they’re convinced that the bank is going broke. Everyone tries to withdraw his money before that happens. If the bank does finally go under, the people who failed to withdraw their money are left with a bank that has no money to return to them.

That’s what the FDIC is all about. It insures everyone’s deposits up to a limit of $250,000. The limit used to be $100,000 but U.S. officials, for whatever reason, wanted to make depositors feel even more secure about keeping their money in the bank.

The idea is that people don’t have to worry about losing their money if their bank goes under because the federal government will use taxpayer money to reimburse them. Thus, knowing that their money is “insured” by the government, people have less incentive to rush to the bank to withdraw their money in the event of a potential bank failure.

Of course, one problem with the FDIC insurance is that it enables weaker banks to continue operating, which could make the problem much worse in the future. Without the FDIC, weak banks would go under sooner because people, sensing a problem, would rush to withdraw their money.

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Bloomberg Reporter: “We Seem To Be Tailspinning Into Chaos”, by Nikos Chrysoloras

Posted on February 28, 2022 | Leave a comment

Chaos, as SLL has repeatedly predicted, will be the order of the day for many years, and reality seems to be conforming nicely to that prediction. From Nikos Chrysoloras at zerohedge.com:

Some scary observations from Bloomberg senior markets reporter Nikos Chrysoloras, as tweeted late on Sunday.

1) BP decided to take a hit of as much as $25 billion, just to leave Russia immediately

2) Russia’s bond market is collapsing

3) Russians lined up at cash machines around the country to withdraw foreign currency

4) Unless there’s a surprise de-escalation, Monday may turn out to be a dramatic day for the ruble, Russian stocks, and European markets

5) The European Union closed its airspace to Russia. The blockade applies to any plane owned, chartered or otherwise controlled by a Russian person. Unprecedented

6) The decision to exclude Russian banks from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system

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Bank Run? Canada’s Top Banks Mysteriously Go Offline, by Tyler Durden

Posted on February 17, 2022 | Leave a comment

You wouldn’t know now if a bank or banks are subject to a run because banking is done online and at ATMs. If they were, you might just get an online notice that online banking was down . . . like Canadians received the other night. Certainly Dictator Trudeau’s freezing bank accounts doesn’t increase confidence in the Canadian banking system. From Tyler Durden at zerohedge.com:

Days after Canadian Prime Minister Justin Trudeau said he would invoke emergency orders to crack down on demonstrators by freezing their bank accounts, five major Canadian banks went offline on Wednesday night, as customers reported their funds were unavailable, according to technology website Bleeping Computer.

Royal Bank of Canada (RBC), BMO (Bank of Montreal), Scotiabank, TD Bank Canada, and the Canadian Imperial Bank of Commerce (CIBC) were all hit with unexplainable outages on Wednesday evening. Users began reporting issues with banks around 1600-1700 ET, Downdector data showed.

Canadian Twitter users reported they couldn’t access their funds at the ATMs. One user took a photo of an error message at one of RBC’s ATMs that read, “Tap transactions aren’t available for this card.”

In response, RBC tweeted, “We are currently experiencing technical issues with our online and mobile banking, as well as our phone systems.”

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The anatomy of a financial crisis, by Tuomas Malinen

Posted on August 25, 2020 | Leave a comment

A run on banks starting in Europe is certainly a realistic candidate to accelerate the deepening financial crisis. From Tuomas Malinen at gnseconomics.com:

In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the ‘shock’ or ‘trigger’ that initiates it.

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g., Q-Review 4/2017). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.

So, let’s dive in.

The initiation

If a banking system is sound and robust, it can usually withstand financial and economic shocks.

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets—usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the European banking sector finds itself in.

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank’s share price will usually start to reflect this.

A ‘bank run’

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.  If allowed to continue, this will have a calamitous impact on liquidity in money markets.

In the worst case, possibly fueled by rumors and insider information, a ‘bank run’ will ensue, where depositors try to withdraw their money suddenly and simultaneously.  In years past, depositors would queue outside of bank offices to obtain cash.  Now withdrawals are largely electronic.

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The Evolution Of The Bank Run, by Claudio Grass

Posted on November 29, 2019 | Leave a comment

Bank runs are demonstrations of crowd psychology, but they’re usually not irrational. From Claudio Grass at lewrockwell.com:

There are numerous and wide-ranging reasons why someone may choose to invest in physical precious metals. A deep understanding of monetary history provides plenty of solid arguments, and so do the mounting geopolitical risks, the spiking probability of a recession and the long-term goal of many conservative investors to safeguard their financial self-determination. For me, while all of these reasons are important, there is also another argument that I find especially powerful and extremely relevant today. The vulnerability of the current banking system itself is a risk that is often overlooked or dismissed, as most mainstream investors, having short memories and a narrow attention span, tend to believe blindly in the banking sector’s ability to protect and preserve their assets and their savings.

A clear and present danger

For most people, the very idea of a bank run is quaint and anachronistic. It conjures up black-and-white images of 1929, and it harks back to the old fears of the analog times. Today, they think, these risks are a distant memory and nothing for the modern investor, or bank customer, to seriously worry about. We have sophisticated systems in place, strict regulations in the banking sector and computers that cut out emotional impulses and smoothly control everything. Surely, banks are safer than ever. And yet, nothing could be further from the truth. Bank runs, far from being a thing of the past, still present a very real risk. Customer confidence can collapse as easily and as rapidly as it did a century ago. Any bank’s creditworthiness and reputation can come under fire and mass withdrawals can cripple any financial institution.

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Chinese Bank On Verge Of Collapse After Sudden Bank Run, by Tyler Durden

Posted on November 1, 2019 | 1 comment

The Chinese banking system is yet another of a multitude of worrisome situations that have the potential to fully ignite the next global financial crisis. From Tyler Durden at zerohedge.com:

First it was Baoshang Bank , then it was Bank of Jinzhou, then, two months ago, China’s Heng Feng Bank with 1.4 trillion yuan in assets, quietly failed and was just as quietly nationalized. Today, a fourth prominent Chinese bank was on the verge of collapse under the weight of its bad loans, only this time the failure was far less quiet, as depositors of the rural lender swarmed the bank’s retail outlets, demanding their money in an angry demonstration of what Beijing is terrified of the most: a bank run.

Local business leaders, political cadres and banking executives rallied Thursday at the main branch of Henan Yichuan Rural Commercial Bank, just outside the central Chinese city of Luoyang, where they stood one by one before a microphone to pledge their backing for the bank, as smiling employees brandished wads of cash before television cameras to demonstrate just how much cash, literally, the bank had.

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Bank Run: Deutsche Bank Clients Are Pulling $1 Billion A Day, by Tyler Durden

Posted on July 17, 2019 | Leave a comment

Might this be the snowball rolling down the hill that starts the global financial avalanche? From Tyler Durden at zerohedge.com:

There is a reason James Simons’ RenTec is the world’s best performing hedge fund – it spots trends (even if they are glaringly obvious) well ahead of almost everyone else, and certainly long before the consensus.

That’s what happened with Deutsche Bank, when as we reported two weeks ago, the quant fund pulled its cash from Deutsche Bank as a result of soaring counterparty risk, just days before the full – and to many, devastating – extent of the German lender’s historic restructuring was disclosed, and would result in a bank that is radically different from what Deutsche Bank was previously (see “The Deutsche Bank As You Know It Is No More“).

In any case, now that RenTec is long gone, and questions about the viability of Deutsche Bank are swirling – yes, it won’t be insolvent overnight, but like the world’s biggest melting ice cube, there is simply no equity value there any more – everyone else has decided to cut their counterparty risk with the bank with the €45 trillion in derivatives, and according to Bloomberg Deutsche Bank clients, mostly hedge funds, have started a “bank run” which has culminated with about $1 billion per day being pulled from the bank.

As a result of the modern version of this “bank run”, where it’s not depositors but counterparties that are pulling their liquid exposure from DB on fears another Lehman-style lock up could freeze their funds indefinitely, Deutsche Bank is considering how to transfer some €150 billion ($168 billion) of balances held in it prime-brokerage unit – along with technology and potentially hundreds of staff – to French banking giant BNP Paribas.

One problem, as Bloomberg notes, is that such a forced attempt to change prime-broker counterparties, would be like herding cats, as the clients had already decided they have no intention of sticking with Deutsche Bank, and would certainly prefer to pick their own PB counterparty than be assigned one by the Frankfurt-based bank. Alas, the problem for DB is that with the bank run accelerating, pressure on the bank to complete a deal soon is soaring.

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The Yellow Vests Get it Right, by Robert Gore

Posted on January 13, 2019 | 39 comments

Financial nuclear warheads.

The mainstream media has degenerated irreparably. Here’s a reliable rule of thumb: if it’s important it’s not covered; if it’s covered it’s not important. Stories in the American mainstream press about Yellow Vest protests have been few. One aspect of the protests, transcendently important, has received scant coverage.

The Yellow Vest protestors have called for a coordinated run on French banks. Whether they realize it or not, they’re playing with nuclear warheads that could annihilate not just the French, but Europe’s and the entire world’s financial system. Because inextricably linked to the ends of contemporary governments―how much they can screw up the lives of those who must live under them—is the question of means―how do they fund their misrule? The short answer is taxes and debt.

Since 1971, when President Nixon 
“temporarily” suspended international convertibility of dollars for gold (it’s never been reinstated), the monetary basis of the global economy has been fiat debt. Neither government or central bank debt nor currencies are tethered to any real constraint, like precious metals (see “Real Money,” SLL). Thus, politicians and monetary officials can create as much debt as they want: debt by fiat.

Government and central bank debt is at the apex of the global debt pyramid. The next tier is commercial banks that have accounts at central banks. Those accounts are bank assets and central bank liabilities, or debts. Central banks expand their fiat liabilities to banks in exchange for banks’ fiat government debt, an exchange called debt monetization, which is a bit of a misnomer since no “Real Money” is involved. The “monetization” is the central bank’s fiat expansion of banks’ accounts with the central bank in exchange for fiat government debt, which expands banks’ assets available for loans to governments, businesses, and individuals.

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