Avoiding Bank Runs
A bank run is when a large number of people rush to withdraw money from the bank at the same time. While this might be a good thing for a bank, it is not good for the economy. If the run is uncontrolled, the entire financial industry could suffer. It could be the tipping point of a financial meltdown.
The best way to avoid a bank run is to stay on top of your money. In addition to ensuring you have enough funds in your account, you also need to understand how banks operate. Banks charge fees for things like overdrafts and for exceeding their maximum withdrawal limits. These fees can cause problems. Using ATMs within your bank’s network will help minimize the impact on your finances.
A bank run is actually not a new phenomenon. The Great Depression saw the beginnings of a banking collapse. Depositors panicked and rushed to withdraw their money before the bank closed. During the 1930s, the largest casualty of a bank run was the Bank of the United States. There was also a bank run in 1931, as well as one in 1932.
As banks become more sophisticated, they only keep a small percentage of their deposits in cash. This is often referred to as a fractional reserve system. When a bank runs out of cash, it borrows from another bank. Other banks may also lend to a bank in need. However, this does not guarantee that the other banks will honor the loan.
Many banks are now enforcing their own daily maximum withdrawal limits. Often, customers will need to give advance notice. Some of these larger withdrawals can even cause negative effects on your credit score. You can also take advantage of the debit card’s cash back feature.
An obvious question is why the hell people would want to take a hundreths of their savings out of their bank. One reason might be that they feel safer keeping their money in their own home. Another reason might be medical emergencies. Although it is a good idea to have some extra cash on hand in case of an emergency, you don’t want to rely on your savings for a lifesaving operation.
A better solution might be to close the bank for a period of time. At the same time, you may want to make sure you have the right insurance. Fortunately, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account.
Not only are there practical considerations to take into account, there are also more esoteric reasons why people might want to withdraw their money. For instance, you might have a relative in need of a large sum of money. Rather than having the bank call the relative, you might have your relative deposit that amount in a different bank. Or, you might decide to place your cash outside of the country.
The COVID-19 pandemic has changed the way people think about their money. This has led to a rise in ATM usage. Even in more remote towns, people are able to use their debit cards to pull out larger amounts of money.
