Tag Archives: Deposit Insurance

The Evolution Of The Bank Run, by Claudio Grass

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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Here’s an easy way to tell if your bank is actually safe, by Simon Black

Banks lend out most of the money deposited with them. This makes them an inherently risky proposition, and if you think government regulation and deposit insurance solve that problem, think again. From Simon Black at sovereignman.com:

March 15, 2013 was a pretty normal day in Cyprus. It was a Friday, and most people were looking forward to a relaxing weekend.

The next morning the entire nation woke up in horror. Their politicians had been up all night, negotiating with international lenders to provide an emergency loan to the country, and its banks.

It turned out that the banks in Cyprus were all insolvent; just like banks in the United States during the 2008 sub-prime crisis, banks in Cyprus had been making idiotic decisions with their customers’ hard-earned savings.

And by 2013, the banks’ losses were too great to ignore.

Unfortunately for depositors, the government of Cyprus was also broke, and they were unable to bail out the banks.

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