Researchers at the Federal Reserve Bank of New York said Tuesday that poor bank fundamentals, rather than bank runs alone, are the key factor behind banking crises, based on a new study examining more than 3,000 U.S. bank runs between 1863 and 1934.
A bank run occurs when large numbers of depositors withdraw their money simultaneously because they fear a bank could fail. While bank runs have long been viewed as a trigger for financial crises, the researchers said their findings suggest they become economically damaging mainly when banks are already financially weak.
AI Unlocks New Historical Database
The study, published on the New York Fed’s Liberty Street Economics blog, used large language models (LLMs) to analyze millions of digitized historical newspaper articles, creating what the researchers described as the most comprehensive database of U.S. bank runs to date.
The researchers found that weak banks were considerably more likely to experience runs than healthier institutions. While runs also occurred at financially strong banks, those banks almost always survived.
Among banks that experienced a run, about 38% ultimately failed, suggesting a run is not necessarily a death sentence. Banks with the weakest financial health had about a 63% probability of failing after a run, while the strongest banks rarely failed.
The study also found that bank runs leading to failures caused significantly larger declines in local lending and manufacturing activity than runs where banks remained open.
The researchers concluded that the evidence offers little support for the idea that relatively small shocks alone can trigger widespread banking panics. Instead, bank runs should be viewed as a trigger that exposes deeper weaknesses in financially troubled institutions.
Lessons After Recent Banking Turmoil
The findings revisit questions that resurfaced during the 2023 regional banking crisis, when the collapses of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) renewed concerns about depositor confidence and financial stability.
The study also comes as parts of the financial sector continue to face closer scrutiny. Earlier this week, HSBC Holdings plc (NYSE:HSBC) said it was pulling back from some higher-risk private credit lending after a series of high-profile bankruptcies intensified concerns over underwriting standards, while investor withdrawals have increased pressure across portions of the private credit market.
Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors.
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