Bank run: How serious is the threat?

Throughout history, bank runs have been a frequent occurrence, and they now constitute a significant danger to the stability of financial institutions. When many depositors remove their money from a bank quickly, it is referred to as a "bank run," which frequently results in the bank's collapse. 

The recent Silicon Valley Bank (SVB) bank run serves as a stark reminder of the continued risk that these occurrences present to our financial system.

Bank runs have a long history, starting in the 19th century when there was no regulation of banks and no deposit insurance to safeguard depositors. The Panic of 1907, which began when the Knickerbocker Trust Company in New York City went bankrupt owing to fraudulent operations, was one of the most catastrophic bank runs in the United States. People began taking their money out of other banks due to this incident, which sparked a wave of fear and created a major liquidity crisis. When JP Morgan intervened and gave money to the banks in jeopardy of collapsing, the problem was finally solved.

Due to new laws and deposit protection schemes, bank runs have decreased in frequency in recent years. Nevertheless, they continue to happen, as was the case with Silicon Valley Bank. SVB, renowned for its venture capital and technology loans, went through a bank run in March 2023 that resulted in a substantial loss of deposits. 

VB was the preferred lender for many fledgling businesses in California's technology (tech) sector, the nation's so-called tech hub, and the 16th largest bank in the country. All of that changed on March 10 when it collapsed, a newsworthy occurrence that made headlines throughout the world. Since the financial crisis of 2008, this turned out to be the largest bank collapse in the US. What happened to the 40-year-old bank so well-liked by all parties involved in the American technology sector?

The increasingly connected character of the global financial system was one factor behind the SVB bank run. Bank runs in the past were frequently confined to certain geographic areas or marketplaces since information on the state of individual banks was not generally shared. But in the era of social media and instantaneous communication, news and rumours may travel swiftly, causing panic to spread quickly and destabilising financial institutions globally. 

Another reason that may have contributed to the SVB bank run is the rising concentration of wealth and power. The financial standing of banks that specialise in the technology sector, like SVB, is becoming more and more crucial to the whole economy as more and more capital pours into Silicon Valley and other innovation clusters. Any major interruption to these institutions might have far-reaching effects, possibly even sparking a more severe financial catastrophe.

Bank runs have been uncommon in Bangladesh, but when they occurred, they had a profound impact on the country's financial system. 

The most noteworthy instance of a bank run in Bangladesh was in 2013, when AB Bank, a private commercial bank, experienced a significant loss of deposits from its clients. Rumours regarding the bank's financial soundness and concern over losing money led to its bank run. Customers of the bank experienced a wave of fear as a result and started taking their savings out of the bank. There was a significant liquidity crisis as a result of the bank's inability to supply the rapid demand for cash. 

In 2019, clients of NRB Commercial Bank began withdrawing their savings, which resulted in another bank run in Bangladesh. These issues were ultimately addressed when Bangladesh's central bank, Bangladesh Bank, infused money into the banks, regaining trust in its capacity to maintain its financial stability.

The Bangladesh share market scam of 2011 is another case that merits note. It was one of the biggest financial scams in the nation's history and had a considerable influence on the stock market. The fraud created widespread investor fear, which in turn led stock prices to plummet and the Dhaka Stock Exchange (DSE) to suspend trading. 

The swindle also demonstrated the link between financial scams and bank runs, as many investors raced to withdraw their money from the banks as a result of the fraud since they thought it wasn't safe. Which in turn exposed a significant liquidity crisis as a result of the banks' inability to supply the rapid demand for cash. 

The connection between the share market hoax and the subsequent bank runs is obvious. By instilling investors with a false sense of confidence, the fraudsters were able to manipulate the stock market and cause a bubble. The bubble burst when the fraud was discovered, causing a loss of trust and a run on the banks.

Also, as we know, state-owned banks predominate in Bangladesh's banking industry, with private banks only recently flourishing in the market. And though there has been tremendous progress in Bangladesh towards financial inclusion, with more individuals having access to banking services, there are still worries about the stability of the industry. More control and regulation are required in light of reports of loan defaults, irregularities, and bad governance. 

To that end, the cabinet approved a draft Bank Company Amendment Act, 2023, a few days ago, which would introduce severe consequences for habitual loan defaulters and limit the influence of families on the bank board in order to combat money laundering and loan defaults, which have been wreaking havoc on the entire economy and draining the forex reserves of the country. The draft act, which has been in the works since 2019, will be placed before the parliament for final approval.

If the draft law gets approved—and a big if it gets thoroughly implemented—banks must publish lists of wilful defaulters in newspapers and on their websites. In addition, if a person refuses to pay back a debt obtained in their or their company's name while having the ability to do so, they are regarded as wilful defaulters. And anyone who takes out loans in the name of a fake firm will be considered a habitual defaulter.

 Does it all sound too good to be true?

The writer is a third-year honours student majoring in Finance and Banking at Govt BM College, Barishal.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.