Could the Cyprus deposit tax lead to a bank run?
When Cyprus announced it would be seizing a percentage of all savings accounts in the country, people hightailed it to ATM machines to pull out as much cash as they could. Is this the first sign of a run on Cyprus banks?
Bank runs usually start with a panic that causes a large number of account holders to try to withdraw their funds all at once. Most people have never experienced a run on their bank. Maybe you’ve seen old black and white Depression photos of people lined up outside a bank to withdraw their money.
“When that happens to any bank, that bank is in trouble,” says Alex Pollock, a fellow at the American Enterprise Institute.
Pollock was a bank officer at Continental Illinois in 1985 when a run on that bank caused its failure. It was the largest bank failure in United States history until 2008.
Pollock says you shouldn’t think of your deposits as physically being in the bank, because they’re not. The bank keeps some of the money, but most of it gets lent out to other customers.
That’s why banks can’t handle large numbers of depositors withdrawing their money — their loans to the bank — all at once. On paper the banks have your money, but only in the form of loan guaranties. In 1933, the FDIC was created to insure all that money that banks have on paper, but not in their vaults.
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