What you need to know about bank raids

Bank run is one of those rare financial terms that sounds like it.

It literally starts with a crowd of people running towards the bank.

While it may seem like a simple nuisance to bank employees trying to go home at 5:30, even the smallest bank withdrawals can be devastating.

Bank raids precipitated the Great Depression, destroyed modern banks, and even played a major role in modern wars.

So what is a bank run? What should every young American investor know about them? Why are they so destructive, and should you ever get involved in a bank robbery?

What is a bank run?

A bank run occurs when a large group of people simultaneously try to withdraw their cash from a bank. Since banks do not have much cash, they must sell assets to meet demand, risking a default. When they risk default, people panic even more and provoke even more bank runs.

Bank raids are a nasty business, so let’s start with the basics.

Why did everyone immediately rush to withdraw cash?

People may rush to the bank to withdraw cash for various reasons:

• They are afraid that the bank will default.
• They are afraid that the economy will collapse.
• They try to convert cash into goods or foreign currency to avoid inflation.
• They need money to cross the border during the war.
• They are afraid that there will be a seizure of bank accounts, and ironically cause bank escape.

So, there are many reasons why people might want their money. But if you have $2,000 in Chase’s checking account, why should Chase be scared or surprised if you actually go and get it?

Why bank runs are a big problem for banks

Let’s say you have a net worth of $25,000:

• $5,000 in checks and savings.
• $10,000 in 401(k) and other investments.
• $10,000 in your car.

All of a sudden, you receive an unexpected $25,000 medical bill.

Could you pay this bill?

From a technical standpoint, yes.

But net worth does not mean having cash. You have $5,000 in cash (actually) and $20,000 in less accessible places.

Thus, in order to pay the bill, you will need to empty your accounts, sell your car, and close all your investment positions within a short period of time.

• Even if you managed and paid the bill in full, you would insolventwhich is basically the formal economic term for a bankrupt AF – no assets, no savings, no.
• When you can’t pay your next bill, you go to Default.
• When you are in default and behind the bills, you can declare bankruptcy Seek legal help in managing your debt.

Basically, this is what happens to a bank during a bank run; they are forced to convert assets into cash, leaving them with nothing.

Suppose a bank has $100 million in assets but only $5 million in cash.

• If customers try to withdraw as little as $10 million in cash in one day, this will force the bank to sell off some assets prematurely, reducing their solvency.
• Decrease in solvency can lead to the fact that customers and investors will be afraid of a bank default.
• Fear of a bank default is making more and more people want to withdraw cash.
• Now the bank is forced to sell off so many assets to meet cash needs that they can now effectively default.

Are you beginning to understand why bank runs are considered a self-fulfilling prophecy?

It is therefore not surprising that Roosevelt began his inaugural address in 1933 with the following words: “The only thing we have to fear is fear itself.”

Bank raids, silent bank raids and bank panics

In addition to bank raids, anyone who considers themselves financially savvy should also be aware of hidden raids and panics.

• The bank is working occur when people literally run to the bank to withdraw cash in person.
• Quiet bank is working occur when people withdraw funds electronically while still effectively transferring money from the bank.
• banking panic occur when several banks simultaneously face bank runs that can lead to the collapse of the entire national economy.

This covers the basics of the term, so let’s put it in some context. Have we ever experienced a bank run?

Has there ever been a bank run in the US?

We definitely have, and I bet you’re smart enough to guess when.

When the stock market crashed in 1929, Americans began pulling cash from the banks and literally stuffing it under their mattress to protect it.

And who could blame them? Then, if your bank collapsed along with your money inside, they simply did not exist.

The mattress stuffing strategy spread like wildfire, and when rumors spread that banks were preventing people from withdrawing money, it set off a real panic.

In the early 1930s, people were sucking all the money out of the banks. The banks, in turn, had no money to lend, so the entire global economy came to a standstill.

By 1933, Congress was desperate for a way to get Americans to put their money back into banks, so they came up with the Federal Deposit Insurance Corporation, or FDIC, which essentially told them, “If your bank fails, we’ll catch you.”

Today, the FDIC insures each of your bank accounts for up to $250,000.

Additional measures used to prevent bank runs include borrowing from other banks, restricting cash withdrawals, or even shutting down a bank entirely for a “holiday” until the panic subsides.

These measures were not enough to save Wachovia or Washington Mutual during a recession, but since 1933 they have saved many banks around the world.

So, in short, it’s a bank run: people withdraw their cash for various reasons, the bank starts to suffer, and the news that the bank is suffering causes more people to withdraw their cash.

Now, if you’ve been following current events lately, your fresh knowledge of banking may raise another question:

Why is Russia facing a bank run and not Ukraine?

A nuclear superpower has invaded its neighbor, literally blowing up the banks, and yet the invader is bankrupt.

Hm? How?

Simply put, Ukraine was ready, but Russia was not.

With the buildup of Russian troops on the border, the Ukrainian government knew they were in danger of bank raids. Therefore, they enter into deals in advance with Poland and the International Monetary Fund (IMF) to secure loans and stabilize the Ukrainian hryvnia.

On the night of the invasion, Zelenskiy also froze wire transfers and only allowed every Ukrainian to withdraw about $3,400 in cash.

This amount of cash still required drivers to deliver cash under heavy fire, but the plan worked; Ukrainians were able to withdraw enough cash to flee and relocate, and the economy survived.

Russians, on the other hand, face more difficult economic circumstances.

The country’s central bank has taken some precautionary measures to protect the ruble, but Western sanctions have broken its economic defenses. Russia was frozen from its massive $643 billion foreign exchange reserve, unloaded from SWIFT, and the ruble fell 40%.

As a result, Russians are (understandably) cashing in on banks all over the country, desperately trying to convert their rubles into something anything that will retain their value: Victoria’s Secret bras, bitcoins and even Big Macs.

The situation in Ukraine and Russia shows the other side of bank forfeiture: how, in times of war, a foreign power can help you avoid bank seizure or, conversely, use it as a weapon of war.

Take the words of Sergei Aleksashenko, the former head of the Russian central bank: “This is a kind of financial nuclear bomb that is falling on Russia.”

Of course, the ruble rebounded in early April, thanks in part to oil and gas sales, but Russians are still very wary that their situation remains bleak. Interest rates are 20%, inflation has reached 200%, and the population is preparing for a massive shortage of goods, both foreign and domestic.

All this in a matter of weeks, which begs the question:

What to do during a bank run?

Seeing long lines of normal Russians trying to save their livelihood, you might wonder: are they doing the right thing? And is there a time when I have to run to the bank?

The short answer is no; you will never have to run to a US bank for several reasons:

• Unlike the ruble, the dollar has been the main world reserve currency since 1944, which means that it is more stable and supported by the world market.
• With so many rules and security measures, the chances of a modern American bank failing are significantly low.
• Even if your bank fails, your checking and savings accounts are insured for $250,000 each, and the FDIC has repeatedly paid out promised amounts (see: Wachovia, Washington Mutual).

What’s more, if America ever had a crisis worthy of a bank run, the Fed would respond exactly like Zelensky did: limit the amount of cash we can withdraw to a few thousand dollars to keep the economy bubbling.

Even so, if you’re not traveling and/or don’t have access to electronic payments, it’s best to keep your money where it’s at.

Should I keep my money in cryptocurrencies during a crisis?

During the next recession, will it be safer to keep your money in crypto than in a bank?

If you are transferring your money from a bank to a cryptocurrency, you are transferring it from where it is is an FDIC insured to the point where she not.

In addition, the value of cryptocurrencies is likely to fall during a recession as institutional investors tend to move away from high-risk speculative investments during economic turmoil and instead invest in index funds and bonds.

But what about cryptocurrencies as a hedge against inflation? After all, the FDIC will only replace my lost dollars, not protect their value.

For reliable inflation protection that is essentially guaranteed to protect your money, not unlike FDIC insurance, look to I Bonds.

essence

Bank raids may seem harmless – and even look a little ridiculous in photographs – but even the smallest bank raids can send banks and entire economies out of control.

Fortunately, in the US we no longer have to worry about them; but because they affect other countries and play a crucial role in modern warfare, every young investor should know about them.

And while you don’t need to run full speed to a Chase ATM anytime soon, it doesn’t hurt to put some liquidity aside. Here’s everything you need to know about emergency funds.

Featured image: 1000 words/Shutterstock.com

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