Thursday, March 16, 2023

Silent bank runs - Is there a need for withdrawal restrictions


When we think of a bank panic, the image that comes to mind is a long line of desperate depositors all scrambling for their money. Depositors are fighting to get to the front of the teller line. For institutions, there is the image of corporate treasurers on the phone yelling at bank employees to wire money. This is not reality. Bank runs are currently silent, a click of a button. There is a new spend with withdrawing money or sending funds.  There is no noise, no friction, just action. Money can move faster than  ever and many depositors will not even know it is happening.

There is a question of whether there needs to be more frictions in the financial system to combat panics. Funds have gating provisions which are usually not reviewed until the gate goes up. Of course, there will new responses if frictions are added, but the question should be asked; could we reduce the chance of a bank run by forcing withdrawal restrictions in depositors. I am not for it, yet technology creates new issues that must be matched by new regulations. 

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