Opinion by Duncan Mavin | Needed: a way to slow down super-fast digital bank runs
The current crisis has exposed the Achilles’ heel in the “fractional reserve banking” system that underscores modern Western economies. Banks are required to set aside only a portion, or fraction, of the deposits customers place with them. The rest can be loaned out to people to buy houses, invest in businesses and so on.
The problem with this system is that if all depositors demand their money back at once, the bank won’t have enough to pay everyone. It can’t call in loans or cash in other investments as quickly as it must pay depositors, and that means some of those depositors lose out.Bank runs are not new. But what has been somewhat novel at SVB, Credit Suisse and First Republic Bank is the speed customers have demanded their money and the manner the runs have spread.
Each of these bank runs has had its own distinct context: an over-investment in U.S. Treasurys at SVB and, at Credit Suisse, years of accumulating scandals. First Republic Bank had offered low mortgage rates to wealthy customers, which left it sitting on large paper losses when interest rates rose sharply. On the face of it, these were three banks with only loosely related issues.
Regulators in the United States have traditionally tried to prevent this kind of thinking by guaranteeing deposits up to $250,000. But customers with deposits above this level have moved their money to avoid losses, and sometimes even those with funds below the level have followed suit.
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