Two Letters Re: Bank Runs — Implications for Prepared Families

Re the bank runs in the UK and warning about similar actions in the US: I don’t deal much with banks so I have a rather silly question to ask about this situation. If there is a run on a particular US bank that I happen to have accounts/cash in, what actually happens at the bank? Do they close the bank up completely? Can you still access your safe deposit box or is everything shut down? The reason I ask is that if I moved physical cash from my “electronic accounts” to a safe deposit box, will I have access to that box when the bank is closed in a “run” scenario? I realize inflation will go crazy and cash will be worthless, but having some is better than not be able to get to it at all. At least I would have potential access to the cold, hard cash in a safe deposit box. I would also consider moving cash out to other “safe” locations, but I am not really confident about security. There is also the problem with the $10,000.00 cash in/out “restrictions” by the Feds. I already have junk silver coins but I don’t want to convert more of my cash to coin or tangibles in the short term. Any advice? Thanks, – Russ in Georgia

JWR Replies: In the event of a bank run, your local banks’s doors would probably remain open, and you would probably still have access to you safe deposit box. But I still consider leaving precious metals in a bank safe deposit box an unacceptable risk. You never know when a financial crisis could inspire a “banking holiday” (a la 1933) or another ban on private gold bullion ownership. Then, when banks do re-open, there could be some extra scrutiny–most notably an IRS agent (or a delegated bank employee) looking over your shoulder when you access your safe deposit box.

Here are a couple of alternatives a bank safe deposit box:

1.) Hide your precious metals at home, preferably in two well-hidden caches–one small and one large. The small cache would be the one that you could reveal if someone is ever pointing a gun to your head. (Say, for example, a home invasion robbers wearing black ski masks, or perhaps someone else wearing black ski masks.)

2.) A private non-bank safe deposit box company. These are fairly common in the suburbs, but I’ve heard of them in major metropolitan areas. You might have to do some searching to find one near you. This is a poor second choice, because even these firms may be subject to IRS scrutiny in the event of a national financial crisis.

With all that said, I should mention that the likelihood of bank runs in the US is lower than in England. Here is why:

Unlike here in the States, where any deposit up to $100,000 USD is 100% insured (and $200,000 for husband-and-wife joint accounts), England’s deposit insurance system has two tiers. Their Financial Service Authority (the rough equivalent of the FDIC) guarantees 100% of deposits up to £2,000 GBP, and 90% of anything over £2,000 but under £32,000, and, zero for anything above £32,000. So it is safe to assume that most of the people “in the queues” in front of Northern Rock bank branches are people with more than £2,000 GBP on deposit. They are at risk of losing perhaps 10% of their deposits.

Bank runs are largely a psychological phenomenon. There is one apocryphal story about a bank in the midwestern US that placed a newspaper ad offering a free set of dishes for anyone that opened a new savings account. The offer was so good that a line formed and started to extend out the front door of the bank. Seeing the line, passersby assumed that there was a run on the bank, so they quickly extended the queue, intent on extracting their deposits. By the time that the line reached the end of the block, wild rumors had circulated among those in the queue. Some of these rumors reached the head of the line, where at least one early-comer decided to forget opening a savings account and instead asked to close his existing checking account.

Don’t underestimate the ability of people to get panicky. These things can take on a life of their own. Bank runs tend to spread to other institutions, when people start making “just in case”-style decisions. If there are further bank runs in England, I woudln’t be surprised to similar runs in Ireland, Australia, Canada, New Zealand, and perhaps even the United States. And, needless to say, it is the banks most closely associated with home mortgage lending are the most likely to have such problems in the next two years.