http://cobweb.sfasu.edu/~rg/bankrun.htm

Will Bank Runs Shut Down the Banking System?

You may have seen a newsletter ad proclaiming:

"A bank run like no other will bankrupt banks all over the world in 1999"

Let's consider how likely bank runs resulting from the Y2K problem are to shut down the system. First, some background points:

1. Newsletter advertising tends to be overdramatic to attract attention and subscribers. (In this case, the newsletter editor does believe a widespread bank run to be at least very likely.) 2. The editor has a strong bias against fractional reserve banking. This may color his analysis. 3. The editor has been accused of trying, through the advertising and other means, to cause the bank runs he is predicting. There is some plausibility to this accusation since he believes the present banking system to be immoral and would like to see it gone. 4. The underlying premise of the forecast is correct: if all (or even a significant part) of depositors demanded their deposits in physical form in any short period, this would shut the banks down. [link to description of fractional reserve banking?]

The logic of the forecast of banking collapse is straightforward: 1. Banks are in trouble because of Year 2000 problems. 2. Depositors will become increasingly aware of the problems as 1999 progresses. 3. Not being willing to take a chance on their bank not being able to function in 2000, depositors will withdraw their funds in physical form. 4. As these withdrawals accelerate, the banks will not be able to meet them and thus will shut down.

There are thus three key elements to consider: 1. The extent to which banks are in trouble. 2. The degree of awareness among depositors. 3. The action taken by depositors.

I have covered the first point elsewhere on this site. Some banks will not be compliant by the end of 1999, but a substantial majority will. Not all non-compliant banks will fail in the technical sense.

Awareness of the Year 2000 problem has been much slower to spread than aware programmers expected (see e.g. discussions of this on comp.software.year-2000). As awareness spreads, the implications for banks may not be immediately apparent to many people. Thus, concern about the y2k impact on banks has been limited.(Some recent surveys indicate that this may be changing.) On the other hand, we should note that it is perceptions that matter here. It is possible that the perception of bank problems could exceed the actual problems. This factor will need continued monitoring. (see below)

The action taken by depositors seems likely to be of manageable proportions because of: 1. The limited concern among depositors noted above. 2. The natural inertia that keeps even aware people from taking action. 3. Reassuring statements by banks and banking authorities that will be plentiful and believed by some depositors. Coverage by the FDIC will be emphasized. An example is a brochure made availabe by the FDIC. 4. Non-physical withdrawals by some depositors. Bank runs can take the form of adverse clearing balances as depositors shift funds to other banks. This was the case with the Continental Illinois failure. So long as some depositors think some banks are compliant, a portion, possibly substantial, of withdrawals will be in this form. The Federal Reserve can easily handle this type of run. 5. The Federal Reserve has been stockpiling currency in anticipation of increased withdrawals. [link to ref?] 6. In the extreme case, regulatory authorities will limit cash withdrawals from financial institutions.

I have begun tracking the rate of increase in currency in circulation. There was only a very slight increase in the year over year rate of increase (from slightly under 8% to slightly over 8%) in late 1998 and early 1999 compared to most of 1998. However, in March it began to exceed 9% and by early April had almost reached 10%.

In view of the above, I do not believe the banking system will shut down because of Y2K related bank runs. This is not to say that it cannot happen. There would be, in fact, no way to prove that it is impossible even if I believed that. Nonetheless, preparing for your bank not being OK seems a wise precaution since at this point there seems no way to tell if it will be. I have some suggestions for this. (Given some of the comments I have received, I perhaps should note that my thesis in not that there will be no bank runs, but that bank runs will not shut down the banking system.)

Return to Banking System & Year 2000 page

v .95 April 16, 1999

-- Cherri (sams@brigadoon.com), June 04, 1999

Answers

"6. In the extreme case, regulatory authorities will limit cash withdrawals from financial institutions."

That's why I started taking money out a while back. And it's more than that $1,000 per adult.

FYI - I figured a way around limit on cash withdrawals ... if it comes to pass ... which I think it will.

I'm getting a few thousand in Travelers Cheques. If they limit cash withdrawals from banks, I'll use the Travelers Cheques and pocket and save the cash change. A real hassle cause it will mean more frequent shopping trips to various stores ... but, doable.

-- Cheryl (Transplant@Oregon.com), June 04, 1999.

Cheryl

At my bank, we have looked into increasing our traveler's cheques inventory to supplement our (increased) cash inventory at year end, and trying to encourage our customers to withdraw in travelers cheques rather than cash. This strategy is still up in the air. From a "doomer" perspective (sorry about the label, I hate labels), do you think this is a good idea? In other words, in your perspective are travelers cheques a fair substitute for cash?

Also, we have looked into cash withdrawal limits, and as of the present we have emphatically shot them down. The backlash from our customers and the press would be enormous, and would probably lead to massive account closings, cash or otherwise. We are taking the tact of asking our customers if they can wait a few days for us to order the cash for substantial withdrawals. Does this seem reasonable as well?

-- newlurker (no@no.com), June 04, 1999.

You miss the main point of concern over banks regarding Y2K: OF COURSE "banks" will survive (the banking system) no mattter what happens --- they always look out for themselves. And if a few million people get hurt, lose their homes, have no money for food, 1/3 banks are swallowed up by the rest, the Fed gets even more power and monopoly or "re-invents" the system, there's inflation or deflation or a depression, or WHATEVER --- well the banks will eventually be OK, even if there are runs, even if there is a bank holiday.

No, I can sleep well knowing the banks will be safe. As for people ---

thats a different subject.

-- Jon Johnson (narnia4@usa.net), June 04, 1999.

Newlurker, do you believe that the average John Doe thinks that his/her money in the bank is available to them, in cash, at any time? Do they understand what is being done with their deposited money?

Ray

-- Ray (ray@totacc.com), June 04, 1999.

If things get real ugly, what could you purchase in an alley with a "traveler's check"?

-- Will continue (farming@home.com), June 04, 1999.

There is no way there will be bank runs. After all, most people are not interested in if there money is at risk right? No, naturally not. I know you aren't, right? People are more interested in closely following the lack of remediation progress in other countries, embedded systems, interconnectivity and global interdependence, Domino Affects, and three decades of software metrics. Now, if I were wrong, and people did care about their hard-earned money, well then maybe some very tiny minority, say 10%, would go and demand their deposits. Good thing this will never happen, since there isnt even that much physical cash available to be handed out.

Yeah, good thing, right?

-- Rob Michaels (sonofdust@com.net), June 04, 1999.

$1000 per adult? Hmmm...as most of us know, the trouble with this is that there are already a lot of people who have well over $1000 stashed away. Then a few tycoons like Bill Gates come along and withdraw a load of greenbacks (no questions asked for his "type" of course) to stash in a Swiss bank or something, and where does that leave John Q. Public? Screwed, as always. Bank runs? Guaranteed! It's only a matter of when. When some bigshot in the Treasury or FDIC starts to get nervous about the dwindling supply, they'll start to limit withdrawals. Then TSHTF. Even if $200 billion was available, which it ain't, it still wouldn't be enough.

-- @ (@@@.@), June 04, 1999.

If you convert all your money into travelers checks and the American Express computers go down, you can wall paper your bathroom with them. It will become a great conversation piece when guests have to use your bathroom!

The best way to take cash out of the banks is by going to the local coin shop and write a big check for gold coins or silver coins! I bought over $25,000 worth of silver dollars in 1995 when I learned about Y2K. The value of my silver dollars have more than doubled since then. Had I left my money in the bank, I would have realized only a very small % increase.

-- smitty (smitty@sandiego.com), June 04, 1999.

Here I am with my gut feelings and uneducated thoughts: I also think that many people will just not want to risk their hard-earned money. Also, my mother-in-law remembers many banks closing their doors in her lifetime.....FDIC is great but if there are many big defaults on loans, bonds, etc. it won't amount to diddly squat IMHO.

-- Kristi (securx@succeed.net), June 05, 1999.

Cherri,

If there are financial problems, bank runs WILL NOT shut down the "banking system."

The government will shut down the "banking system."

-- Lee (lplapin@hotmail.com), June 05, 1999.

Newlurker:

<in your perspective are travelers cheques a fair substitute for cash?>

At the present time, yes. Year end? NO.

<We are taking the tact of asking our customers if they can wait a few days for us to order the cash for substantial withdrawals. Does this seem reasonable as well?>

Depends on what you call "substantial" withdrawals.

Since you're in the banking business, you might be interested in banking activity survey at this new thread I just started: http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=000unN

-- Cheryl (Transplant@Oregon.com), June 05, 1999.