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Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd ru

Bank runs killing healthy banks hadn't happened in nearly living memory, but it used to be a thing. Before 1933, if you heard your bank was unhealthy, you'd run to the bank to take out all your money before it vanished. So even a bank with a positive net assets and large liquidity could fail. All it took was a rumor causing a bank run that exceeded the liquidity. This is why the FDIC was formed: to stop rumors causing bank runs. Since the average person knows their deposits are insured, your money isn't going anywhere, so theirs no need to do a bank run. What failed here is that a group of uninsured depositors did an old fashion bank run. That's why the FDIC announced early that everything was covered: to very clearly telegraph that the bank run was unnecessary, and you shouldn't be doing them.

marcosdumay 4y ago
> What failed here is that a group of uninsured depositors did an old fashion bank run. Oh, there was so much stuff that happened. You had a bank where the wide majority of the deposits were uninsured. That's quite a major problem. But then, it doubles down in that those deposits were largely correlated. They increased all together, and decreased all together. The bank then made sure to double down on that correlation and favor lending to people whose income were highly correlated with their deposits. Then, when they got a highly correlated amount of deposits, they decided that the risk of a highly correlated change on their funds was low, and optimized for long-term profits instead of safety. (Why? I still don't fully understand this. I was expecting to see one of those "tails we win, heads you lose" games banks like to play, but from what people say, looks like bare incompetence was a very important factor here.) Then they use corruption... ops, sorry, lobbying to make sure the government doesn't stop them from betting against their deposits and debit repayment being correlated. And finally, they got all so surprised by a highly correlation stop on deposits (and probably repayments) when withdraws kept going. That one bank failure was quite a feat, and it's completely unfair to blame it on a bank run.

marcosdumay 4y ago

> What failed here is that a group of uninsured depositors did an old fashion bank run. Oh, there was so much stuff that happened. You had a bank where the wide majority of the deposits were uninsured. That's quite a major problem. But then, it doubles down in that those deposits were largely correlated. They increased all together, and decreased all together. The bank then made sure to double down on that correlation and favor lending to people whose income were highly correlated with their deposits. Then, when they got a highly correlated amount of deposits, they decided that the risk of a highly correlated change on their funds was low, and optimized for long-term profits instead of safety. (Why? I still don't fully understand this. I was expecting to see one of those "tails we win, heads you lose" games banks like to play, but from what people say, looks like bare incompetence was a very important factor here.) Then they use corruption... ops, sorry, lobbying to make sure the government doesn't stop them from betting against their deposits and debit repayment being correlated. And finally, they got all so surprised by a highly correlation stop on deposits (and probably repayments) when withdraws kept going. That one bank failure was quite a feat, and it's completely unfair to blame it on a bank run.