Bank runs have been in the news recently, which may have led you to wonder exactly what they are and if you should be concerned about them happening here in the Philippines.
A bank run can actually happen in any country and even to the strongest of financial institutions. Despite this, it is still best for you to keep your money in a deposit account instead of just stashing it at home. Read on to get the full details.
What causes a bank run?
While there are many possible triggers for a bank run, all of them are linked to many depositors losing their confidence in a bank’s ability to give back their money.
When this happens, these customers will withdraw their cash. This won’t be an issue at the start, but if a lot of depositors do this all at the same time, the bank will eventually run out of liquid cash to serve withdrawals.
That’s because banks loan out money as part of their business, and so they won’t have all the money of all their depositors available for withdrawal at the same time.
Instead, they have an amount that they must maintain called the Reserve Requirement Ratio or RRR, which is set by the Bangko Sentral ng Pilipinas (BSP). This is a percentage of the total value of the deposits that a bank holds.
The RRR is typically enough for higher-than-normal withdrawals plus a buffer amount. However, this reserve may be insufficient if a lot of clients pull their money out. If this happens, the BSP will have to step in to find the best solution for the customers.
This may include the BSP lending money to the bank, or even potentially taking control of the bank and its assets.
Can a bank run spread?
Since a bank run is essentially a crisis of confidence, there’s a chance that customers of other banks will be worried enough to start pulling their money out, even if there’s no real reason for them to do so. This is called “contagion.”
This doesn’t mean, however, that the bank run is sure to spread across the entire industry. There have been times in which only a few or even a single bank experienced the run, although some uncertainty was sure to have been felt by depositors in general.
On the other hand, a major bank run in an internationally influential country has a chance of affecting other places too. This is especially true if foreign institutions hold equity or debt of the banks that are in trouble.
Deposit insurance adds confidence
The possibility of a bank run is the primary reason for the deposit insurance coverage of the Philippine Deposit Insurance Corporation or PDIC. With this, depositors are insured for up to P500,000 in total per depositor, per bank.
This can do a lot to give some comfort and security to people who place their money in a bank for safekeeping and other purposes.
In addition, there is also the chance that the government will step in to help an institution stay afloat during a bank run. This is even more likely for those that are considered “too big to fail.”
This term refers to those banks that are so large and so connected to different sectors and industries that they would cause a massive economic shock were they to go under.
