How Can Banks Survive The Next Big Crisis?
- Editorial Staff
- 11 minutes ago
- 3 min read
Takeaway: By tracking nearly 4,000 bank runs across seven decades, researchers found that while panic can strike healthy and weak banks alike, runs rarely drive institutions to failure when their underlying financial health solid.
Key Points
Healthy banks frequently survived historic bank runs by borrowing emergency cash, signaling solvency, or temporarily suspending withdrawals to let auditors clear their names.
Bank runs rarely cause the collapse of solvent financial institutions; instead, they act as an accelerator that shuts down already weak or mismanaged banks.
Lasting economic damage—such as sharp drops in local business lending and factory production—is driven by bank insolvency and failure, not by short-lived panics at healthy banks.
Several times in recent history, like during the collapse of Silicon Valley Bank in 2023 or at the height of the 2008 financial crisis, a familiar question resurfaced: Can sudden panic destroy a fundamentally solid bank?
Traditional economic theory suggests that demandable deposits make banks uniquely vulnerable. If enough depositors get nervous and rush to pull their cash at the same time, even a healthy bank can be forced into bankruptcy. But how often do liquidity panics actually destroy sound banks, and are runs the primary cause of economic downturns—or merely a symptom of deeper trouble?
To answer this question, economists Sergio Correia, Stephan Luck, and Emil Verner examined U.S. banking history from 1863 to 1934. This pre-FDIC era lacked federal deposit insurance, making bank runs a common occurrence.
Leveraging advances in artificial intelligence, the researchers used large language models to analyze millions of digitized historical newspaper pages, building a novel database of 3,984 individual bank runs. They then paired these narrative news accounts with granular bank balance sheets, local business records, and weekly measures of industrial activity.
Findings
The researchers discovered that while runs were more frequent among weak institutions, healthy banks were by no means immune. Panic often spread to sound banks following bad news about the broader economy, downturns in the stock market, or troubles at neighboring banks.
However, experiencing a run did not automatically mean doom: more than half of the recorded bank runs ended without the bank failing. Healthy banks routinely weathered panicked crowds by borrowing cash from other institutions, temporarily suspending payouts to conduct independent accounting reviews, or staging dramatic public displays of solvency, such as wheeling visible truckloads of cash into the lobby to reassure depositors.
In contrast, when a run hit a bank with low capital reserves, heavy leverage, or poor-quality assets, failure was almost swift. Conditional on a run, institutions in the bottom 10 percent of balance-sheet health failed nearly 60 percent of the time, whereas the strongest institutions almost never went under.
When analyzing rare "non-fundamental" runs—those explicitly triggered by false rumors or simple confusion, such as a crowd gathering for a celebrity outside a bank lobby mistaken for a line of anxious depositors—the failure rate was low, and local economies suffered no lasting damage.
Why It Matters
These findings temper the view that minor, self-fulfilling panics regularly spark catastrophic collapses in healthy banks. While central bank liquidity backstops remain vital during a crisis, this research highlights that solvency—having solid assets and sufficient capital—is the real key to financial stability. For policymakers and regulators, the practical lesson is straightforward: avoiding severe economic downturns requires rigorous oversight of bank balance sheets before a crisis hits, rather than relying solely on liquidity interventions after fear takes hold.
Learn More
Paper Title: Bank Runs With and Without Bank Failure
Authors: Sergio Correia, Stephan Luck, and Emil Verner
Journal: Federal Reserve Bank of New York Staff Reports (No. 1198)
Publication Year: 2026
URL: https://www.newyorkfed.org/research/staff_reports/sr1198
Econ Today Explains
Economic Concept: Demandable Debt
Demandable debt refers to financial accounts, such as standard checking or savings deposits, that customers have the legal right to withdraw in cash immediately upon demand. For commercial banks, demandable debt creates an inherent structural challenge known as a liquidity mismatch: banks use short-term deposits to fund long-term, illiquid assets like home mortgages or business loans.
While demandable debt gives consumers easy access to their money and encourages saving, it leaves banks vulnerable if a large group of depositors demands their cash all at once.
This article was written by AI but reviewed by a real human.
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