What Is a Silent Bank Run?
A silent bank run is a situation in which a bank's depositors withdraw funds in large volumes without physically entering the bank.
Silent bank runs are similar to normal bank runs, except that the withdrawals are made using electronic fund transfers, wire transfers, and other methods that do not require physical withdrawals of cash.
- A silent bank run is similar to a traditional bank run except it involves non-physical means of withdrawing funds.
- Examples of such means include wire transfers, electronic fund transfers, or requests placed through telephone or online banking platforms.
- The 2008 financial crisis saw several examples of silent bank runs occurring throughout the world.
Understanding Silent Bank Runs
Silent bank runs are essentially the modern equivalent of a traditional bank run. Whereas depositors previously would have had to visit a bank in person in order to withdraw their cash, depositors today can place their withdrawal requests using various electronic means, such as through online banking platforms.
In many ways, these new technologies make the prospect of a bank run even more threatening from the perspective of a bank. After all, many of the traditional barriers that might help to slow down the pace of a bank run, such as customers needing to wait in long queues in order to place the order to withdraw their funds, are simply no longer applicable. Similarly, customers today do not need to wait to place orders within a bank's working hours. Instead, they can issue an order online and that order will be processed once the bank opens.
On the other hand, these modern conveniences might also benefit banks by making the occurrence of a bank run less visible to outside observers. After all, a depositor might be more likely to withdraw their funds if they see other depositors lining up outside a bank wishing to do so. With electronic withdrawal requests, the symptoms of a bank run may be less easily seen.
Real World Example of a Silent Bank Run
During the 2008 financial crisis, many financial institutions faced silent bank runs, as depositors feared losing their money if banks were to collapse. Across America and Europe, particularly in the U.K. and Iceland, silent bank runs drained banks of their reserves, which served to deepen the crisis and force several large institutions to the brink of collapse.
One notable silent bank run affected Wachovia in late 2008. It was triggered by the failure of Washington Mutual the day before, which precipitated a 27% drop in Wachovia's stock price. On a Friday, individual and business customers with accounts worth more than $100,000 began withdrawing money in order to bring their account balances below the $100,000 limit insured by the Federal Deposit Insurance Corporation (FDIC). The bank lost about $5 billion to silent run withdrawals over the course of that weekend, which was 1% of its total holdings and enough that the Wachovia would not have had the liquidity it would have needed to open its doors the following Monday. The FDIC stepped in, encouraging the sale of Wachovia to Wells Fargo (WFC).
The Great Recession also saw bank runs happen in nations such as Ireland, the U.K., and Iceland, where depositors' funds were not insured. The governments of Ireland and Denmark addressed silent bank runs in those countries by instituting guarantees on deposit accounts. Banks in the U.K. saw traditional bank runs happening concurrently with silent runs, where some customers withdrew their funds from bank branches in person, and others withdrew their funds via online banking platforms or telephone banking. British bank Northern Rock, the first British bank to experience a bank run of any kind in more than 140 years, experienced both a silent and a traditional bank run, losing more than 14 billion pounds ($25 million) to withdrawals in Sept. 2007, two-thirds of which were taken out by customers performing a silent run.