Here's What Happens When Everyone Panics and Pulls Money Out of Banks

Last month, the collapse of Silicon Valley Bank (SVB) was the second-biggest bank failure in U.S. history. News of bank failures naturally fuels concerns for bank customers everywhere, so you might be wondering what would happen if you pulled all your money out of the bank entirely--and what would happen if a bunch of people shared the same thinking. The result would be what's known as a bank run. In fact, SVB's failure was driven by this sort of run on the bank.

What is a bank run?

A bank run is what happens when a large group of customers run to their bank (either physically or online) to withdraw their money out of fears that the bank will fail. When this is done simultaneously by enough depositors at the same time, the bank will use up their cash reserves and collapse.

A bank run triggered by fear of insolvency can push a bank into actual insolvency, and then turn into a default. In other words, bank runs are something of a catch-22: The fears of a collapse are what lead to the collapse.

Should you be worried about a run on the bank?

Most banks have a limited cash reserve they store in their vaults each day for need-based and security reasons. On the other hand, banks are required to keep a minimum amount of cash reserves on hand to minimize the risks related to bank runs.

Cash reserve requirements aren't the only precautions for bank runs. The Federal Deposit Insurance Corporation (FDIC) was established in 1933 after the stock market crash of 1929 with the purpose of providing economic stability and public confidence in the U.S. financial system. And, as we've touched on recently, the FDIC provides $250,000 worth of insurance per depositor, which means your deposits will be protected up to that amount.

What to do if you're nervous about the banks

Flocking to the banks and withdrawing all your cash isn't a long-term solution. So what can you do as an individual customer? Unfortunately, it's nearly impossible to predict that your bank is failing. Some small steps you can take are keeping Google alert for your bank in case there are news stories about it, as well as staying on top of your bank's stock price.

If you take away one thing today, let it be this peace of mind: If you have less than $250,000 in your account at an FDIC-insured U.S. bank, you don't need to live in a constant state of panic. Reduce your risk of losing money in a bank run by keeping your accounts under that FDIC-insured limit. And if you have more than $250,000 in liquid assets, split up your funds into different FDIC-insured accounts. And if you have more than $250,000 in liquid assets--I'm always looking for someone to take me out to dinner.