What is the 'Bank Panic of 1907'

The Bank Panic of 1907 surfaced at the beginning of the twentieth century from shrinking market liquidity, dwindling confidence by depositors, and plans to regulate trust companies. At the time, trust companies faced increased public scrutiny for adhering to less regulation than national or state banks.

This skepticism triggered a run on the trust companies that continued to worsen even as banks stabilized. Without a central bank, leading financiers like J.P. Morgan stepped in and provided some vital liquidity. Even then, the Knickerbocker Trust Company – New York City's third-largest trust – was unable to withstand the run and failed in late October. This undermined the public's confidence in the financial industry and accelerated the ongoing bank runs. 

BREAKING DOWN 'Bank Panic of 1907'

The Bank Panic of 1907 was ultimately quelled when the federal government provided over $30 million in aid, and leading financiers like J.P. Morgan and John D. Rockefeller continued orchestrating deals to bring confidence and liquidity back to the financial markets. The panic's impact led to the eventual development of the Federal Reserve System. Today, the central bank operates under a dual mandate to maximize employment and stabilize inflation with monetary policy tools like open market transactions.

At the time, the main difference between Europe and US banking systems was the absence of a central bank in the US. European countries were capable of injecting liquidity into the market during periods of financial distress. Many people felt a central bank system could have prevented The Bank Panic of 1907 by providing an extra source of liquid assets for financial institutions to tap into. This ultimately caused leading financiers to draft an early framework of monetary policy and reform in the banking system. That report was shelved until 1913 when then-President Woodrow Wilson signed the legislation into law. It created the Federal Reserve System with Charles Hamlin as the first chairman and Benjamin Strong – a key member of Morgan's company – as the president of the Federal Reserve Bank of New York.

Parallels to 2008 Financial Recession

The parallels between The Bank Panic of 1907 and 2008 Recession are striking. The recent financial crisis was centered around investment banks without direct access to the Federal Reserve System, whereas its predecessor spread from trust companies that existed beyond the New York Clearing House. In essence, both events started outside of traditional retail banking services but still ushered in distrust for the banking industry among the broader public.

The aftermath of the 1907 bank run led to the creation of the Federal Reserve while the recession prompted new reforms like Dodd-Frank. These mechanisms intended to protect the broader public from a financial meltdown and hinder the big banks from taking unreasonable risks.

  1. Trust Company

    A trust company is a legal entity that acts as fiduciary, agent ...
  2. Alimony Substitution Trust

    A trust agreement in which a divorced person agrees to pay spousal ...
  3. Income Trust

    An income trust is an investment trust that holds income-producing ...
  4. Trust Preferred Securities - TruPS

    Trust preferred securities are issued by banks and have features ...
  5. Authorized Investment

    Authorized investments are those that are permitted within a ...
  6. Blind Trust

    A trust in which the trustees have full discretion over the assets, ...
Related Articles
  1. Financial Advisor

    Should You Put Your Faith In A Trust?

    Many institutions want a piece of your portfolio, but trusts can provide a one-stop shop.
  2. Investing

    Unit Investment Trusts Market: 3 Trends in 2016

    Learn more about unit investment trusts (UITs), and discover some of the most common trends in the UIT market to date in the year 2016.
  3. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  4. Managing Wealth

    Surprising Uses for Trust Funds

    Here are five common situations where a trust fund makes financial sense.
  5. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  6. Managing Wealth

    How to Set Up a Trust Fund in Canada

    You don't have to be rich to make use of a trust fund. Rules can be complex. Here's what you'll need to discuss with your lawyer.
  7. Investing

    A Look Into Creating a Trust Fund With ETFs (VCIT, SDIV)

    Learn the basics of how a trust works and the two most common types. Discover how to use ETFs to fund a trust and the different strategies.
  8. Retirement

    You’ve Created Your Living Trust, Now Fund It!

    You set up a trust with your estate planning attorney, but is it actually funded?
  9. Managing Wealth

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  10. Retirement

    Living Trusts vs. Simple Wills: A Comparison

    A look at wills versus living trusts and when to choose one over the other.
  1. What is the difference between a revocable trust and a living trust?

    Learn how a revocable trust and living trust are two terms used to describe the same thing and what the key provisions are ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center