What is a Bank Run and Why Does it Matter?
WHAT IS A "BANK RUN"?
A "run on the bank" is when depositors quickly pull their deposits from a bank. This happened in early March with Silicon Valley Bank (SVB) and other banks are feeling the pressure as well. Bank runs have always occurred, but the unique thing about the current situation is the speed at which banks are collapsing once the run begins. That's because word spreads super-quick on social media and depositors are able to quickly respond on their mobile banking apps via electronic withdrawals and transfers.
The underlying cause of the current crisis is that the value of Treasury bonds and other safe bonds held by many banks has declined significantly over the past year as interest rates doubled. When interest rates go up, bond prices go down. Banks that purchased safe bonds in the past few years have seen their asset values go down significantly. When depositors go to pull their money out in large numbers, the banks are forced to sell their bonds at depressed prices, resulting in a rapid downward spiral. It remains to be seen how many other banks didn't hedge against this scenario and may be impacted by the current crisis.
IS YOUR MONEY SAFE?
The FDIC insures $250,000 per depositor, per insured bank, for each account ownership category. If you have more than $250,000 in an account, you may want to talk to your bank about how to insure or otherwise re-allocate those funds. Alternatively, you could invest your cash in bonds, real estate, or other assets. Talk to your financial advisor to evaluate the investment options for your situation.
HOW DOES THIS IMPACT THE HOUSING MARKET?
When there is turmoil in the financial markets, investors flock to the bond market for safety, which drives down interest rates. Mortgage rates have improved since the banking crisis began, and they may continue to improve, depending on how things play out. As for house prices, housing demand remains strong and supply remains strained. This means that house prices are likely to remain stable.
The FDIC insures $250,000 per depositor, per insured bank, for each account ownership category.
Source: Momentifi