YEREVAN (CoinChapter.com) – FTX implosion shook the crypto market, leaving many without access to their digital asset funds on the exchange. The firm’s insolvency gave critics another reason to badmouth the digital asset sector, pointing out its instability.
However, before blaming the entire crypto market, it pays to take lessons from history. So here are three bank runs that shook the markets in the 20th century.
#1 Great Depression bank runs
In detail, bank runs occur when large groups of depositors simultaneously withdraw their money from banks based on fears that the institution will become insolvent. For example, after the stock market collapse in 1929, the public was left distraught and extremely susceptible to rumors of impending financial disaster.
Thus, many lost no time attempting to withdraw what was still left of their funds. The rush added to the banking system’s many financial woes. As a result of the added strain, many banks were forced to liquidate loans, which led to ubiquitous bank failures.
One of the most prominent examples of a bank run occurred in December 1931. Bank of the United States in New York collapsed, leaving thousands of people bankrupt. The bank had more than $200 million in deposits at the time (roughly $3.5 billion today), making it the largest single bank failure in American history.
Moreover, people’s confidence in the whole banking system rapidly deteriorated.
As a result of the massive contagion and distrust, nearly 2,000 banks in the US alone faced insolvency in 1929-30. Finally, in 1933 President Franklin Roosevelt came along. He convinced the American people that keeping money in the banks is safer than “under the mattress,” bringing back the banking system as we know it.
#2 Toyokawa Shinkin Bank incident
In 1973, while British authorities fined Paul McCartney for growing pot and Queen Elizabeth was busy opening the Sydney Opera House, the Japanese banking system faced a serious roadblock. Two billion yen was withdrawn because of a rumor that “Toyokawa Shinkin Bank would go into bankruptcy” in Kozakai.
Interestingly enough, the rumor could have been unintentional. However, the incident was investigated scrupulously by Japanese authorities, who could separate the sequence of events that led to the bank run.
Allegedly, in a ‘mean girls’-style conversation, a student told her friend that working at the Shinkin bank is “dangerous.”
She meant a robbery scenario. But the thought traveled through the brain of their other friend, who witnessed the conversation and was misconstrued. So, without further ado, the robbery danger warning transformed into a bankruptcy danger warning.
The unfortunate misunderstanding traveled through several people who encountered that ‘other friend’ and led to a rumor about the ban’s insolvency. The situation snowballed to the point where all trust in the bank was lost within days. A statement from Toyokawa Shinkin Bank released to settle the panic missed the target and did nothing to help.
The bank run did not influence the larger market like the Great Depression. However, it provided a valuable lesson on the dangers of rootless panic!
#3 Bear Stearns sinks like the Titanic
Panic-driven bank runs continue with a fresher example from 2008. Bear Stearns was not a deposit-taking bank per se. It financed large long-term investments by selling short-maturity bonds. However, it made the institution vulnerable to panic from the bondholders.
Thus, credit officers from rival firms supplied the panic by asserting that Bear Stearns would not be able to meet its obligations. The statements hit the target and triggered a cascade of bank runs. As a result, Bera Stearn’s capital base shrunk from $17 billion to $2 billion, and the financial firm filed for bankruptcy the next day.
The Federal Reserve extended an offer to lend the firm money, but the stocks sank simultaneously. By Friday, the banking giant JPMorgan Chase stepped forward and purchased Bear Stearns as part of a government-sponsored bailout.
Also read: Bitcoin Price Could Crash to $13K, Warns JPMorgan
The crypto sphere is still in its infancy, and sh*t is bound to hit the fan every so often.
Admittedly, the Terra implosion and the FTX crash cost thousand of people billions of dollars. However, the brains behind blockchain technology will perfect the system sooner rather than later. Before that happens, investors should be mindful of the golden rule: Don’t invest more than you can afford to lose!
