Bank Runs Fueled by Weak Fundamentals, Not Panic Alone

A recent study by the Federal Reserve Bank of New York suggests that underlying poor bank fundamentals, not solely bank runs, are the critical factor in banking crises. Researchers examined over 3,000 U.S. bank runs that occurred between 1863 and 1934. They found that financially weak banks were substantially more prone to failure when faced with a run compared to healthier institutions.

Using advanced AI and large language models, the New York Fed analyzed millions of digitized historical newspaper articles. This process created an extensive database of U.S. bank runs. While financially sound banks could withstand runs, weak banks had a considerably higher probability of collapse. Bank runs that led to failures caused more significant downturns in local lending and manufacturing.

The findings challenge the notion that minor economic shocks alone can initiate widespread financial panics. Instead, bank runs are seen as catalysts that expose pre-existing weaknesses in already troubled financial institutions. These insights are particularly relevant in light of recent banking turmoil in 2023.