Banks don’t actually collapse because someone yells “fire” in a crowded lobby. They collapse because the building was already on fire.
That’s the core finding from a new research paper published by the New York Federal Reserve, which analyzed more than 3,000 US bank runs spanning from 1863 to 1934. The conclusion is deceptively simple: the fundamental health of a financial institution is the primary factor determining whether a bank run actually leads to failure and broader economic damage.
What the research actually found
The New York Fed researchers built a new database using near-universal newspaper records of bank runs during the National Banking Era and the Great Depression. They cross-referenced those records with balance sheet data and macroeconomic conditions to paint a comprehensive picture of what actually drives banking crises.
While bank runs can technically happen at both financially weak and robust institutions, it’s the ones with poor fundamentals that actually fail. The study found little evidence supporting the popular theory that minor shocks can trigger widespread banking panics.
