In this article I want to talk about the event that immediately preceded the passage of the Federal Reserve Act, namely the banking panic of 1907, since many legends and rumors have been created around this event, which conspiracy theorists use in their theories.

It is known that the panic itself began immediately after the collapse of the large trust company "Knickerbocker Trust Company". Various conspiracy theories claim that this company was deliberately bankrupted by first spreading rumors that the company was on the verge of bankruptcy, after which depositors flocked to withdraw their deposits. In particular, this theory was voiced in a documentary film directed by Peter Joseph called "Zeitgeist" (Spirit of the times).

So what really happened?

But in fact, the emergence of the crisis in 1907 was greatly influenced by two events that happened long before:

1. The first blow to the American economy was dealt by nature, namely the terrible earthquake in San Francisco on April 18, 1906. Although the epicenter of the earthquake was in San Francisco, in addition to San Francisco, other nearby cities were also affected, such as San Jose, Santa Rosa, etc. In Monterey County, for example, the earthquake forever changed the course of the Salinas River near its mouth. As a result of this earthquake, more than 3,000 people died, more than 300 thousand were left homeless. The economic damage was enormous. Insurance companies were forced to make huge payments, many of them went bankrupt. This could not but affect the financial markets. Here's what the Financial Times wrote about it on July 6, 1906:
   

   $200 million "ash pile" in San Francisco will cause difficulties that will be felt throughout financial markets for many months

2. That same year, another thing happened. European banks raised their discount rates, resulting in an outflow of money from American financial markets in the face of a liquidity shortage, which in turn arose as a result of the huge funds allocated to rebuilding San Francisco after the earthquake.

The fact that these two events are interconnected and directly influenced the emergence of the crisis of 1907 is proven by economists Kerry A. Odell and Marc D. Weidenmier in a work entitled "Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907" ("Real Shock, Currency Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907"). Here's what they write in particular:

In April 1906, the San Francisco earthquake and fire caused damage equal to more than 1 percent of GNP (gross national product). Although the real effect of this shock was localized, it had international financial consequences: large quantities of gold flowed into the country in the fall of 1906 as foreign insurers were forced to pay out insurance claims to their clients in San Francisco. This outflow prompted the Bank of England to take discriminatory actions against American finance and, along with other European central banks, to raise interest rates. These policies pushed the United States into an economic recession and laid the groundwork for the Panic of 1907.

Further:

The actions of the Bank of England and other European central banks attracted gold imports and sharply reduced the flow of gold into the United States. As of May 1907, the United States was in one of the shortest but most severe recessions in American history. Thus, the preconditions for the emergence of a financial crisis were created. Already weakened, world markets collapsed in October 1907 with the collapse of the Knickerbocker Trust Company in New York."

This is the picture of the crisis that actually emerges.

Now specifically about the banking panic. More details of its origins can be found in the work entitled “Lessons from the Panic of 1907”. In this article I will briefly outline all the circumstances of those events.
In fact, the panic began not with the fact that someone spread some rumors, but with the fact that the Knickerbocker Trust Company, or rather the company's president, Charles T. Barney, entered into a deal with speculators - the brothers August and Otto Heinze, as well as Charles Morse with the goal, as they write in American sources, "cornering the market" copper producer company - "United Copper".
I specifically highlighted the words "cornering the market" to explain what this means. The website "InvestorWords.com" gives the following definition:
"The illegal practice of attempting to purchase a sufficient amount of a commodity or security to manipulate its price."
Translation:
"Illegal the practice of attempting to acquire enough of a commodity or security to manipulate its price."
In short, as they say now, it was a bubble blowing.

So what happened next? Before I continue, I would like to make one clarification:
In the USA there is an organization called "Clearing House". The website "Online Business Dictionary" gives the following definition:
"Affiliated agency or a facility operated by banks within a geographical area to act as a central site for collection, exchange, and settlement of checks drawn on each other."
Translation:
"An affiliated agency or institution used by banks within a geographic area to act as a central hub for the collection, exchange, and settlement of checks drawn by banks on each other."
In addition, there is a body called the "Clearing House Committee", which controls the activities of banks in this region.

So, further, as a result of the fact that speculators either poorly calculated the consequences, or greed ruined it, the bubble burst, and United Copper shares fell sharply in price, causing the collapse of the entire stock market. Everything would not be so scary if not for one circumstance. The fact is that August Heinze, among other things, was the president of the Mercantile National Bank. Since the case became public after the stock market crash, depositors flocked to the Mercantile National Bank to withdraw their deposits. (In English this situation is called "bank run" or "run on the bank").
After this, the Clearing House Committee urgently appointed a commission that was supposed to investigate all the circumstances. After the commission completed its work, the Clearing House Committee decided to provide assistance to the Mercantile National Bank, but on the condition that August Heinze resign from his post. In addition, Charles Morse also had to leave all his posts that he had previously held in various banks. Naturally, both fulfilled these requirements and the bank was saved.

And now directly about the Knickerbocker Trust Company:
Since the Knickerbocker Trust Company was not a bank, but, as its name suggests, a Trust Company, its activities were not subject to regulation by the Clearing House Committee. On the other hand, since trust companies were not banks, they could not clear their checks through Clearing House, so they used intermediary banks. For the Knickerbocker Trust Company, that intermediary was the National Bank of Commerce. So, as soon as the findings of the Clearing House Committee were made public, the board of directors of the Knickerbocker Trust Company demanded that Barney resign. Soon, the National Bank of Commerce announced that it would no longer accept Knickerbocker checks. It was this decision of the National Bank of Commerce that caused the panic.

In 1907, their (Knickerbocker Trust Company) funds were used by then-president Charles T. Barney to increase the value of copper by "cornering the market." It was a gamble unraveled by dumping millions of dollars into the copper market to stop a hostile takeover by an entirely different entity. This became public knowledge, and on October 21, the National Bank of Commerce announced that it would stop accepting Knickerbocker Trust Company checks, causing panic among depositors who began demanding their funds back. Charles Barney asked for a meeting with JP Morgan to discuss bailing out the bank, but JP Morgan turned him down. Because of this and the bankruptcy of the bank, he shot himself on November 14, 1907.

In conclusion, I would like to clarify the situation with the fact that JP Morgan refused to help Knickerbocker Trust Company. In fact, on October 21, Morgan gathered all the company's management and asked them to provide the company's financial statements in order to make a decision on whether to provide assistance. However, this was not done in a short time, and without this information Morgan refused to provide assistance.
By the way, Morgan himself also suffered from the crisis. For example, the shares of the company he owned, U.S. Steel, fell by more than 50%, and yet he still had enough money. But an example of someone who benefited from this crisis is described. When the panic arose, huge queues formed outside the banks, and some people sold their place in line. Maybe it was they who created this crisis in order to make money in this way? I think this hypothesis can also form the basis of a conspiracy theory.

• Panic of 1901- the first market crash on the New York Stock Exchange, caused in part by the struggle of wealthy houses for control of the Northern Railroad. Northern Pacific Railway);
• Banking Panic of 1907, also known as the Panic of 1907, was a financial crisis that occurred in the United States during which the New York Stock Exchange index collapsed to barely more than 50% of the previous year's peak. This crisis occurred during an economic recession and a mass exodus of depositors from banks and trust companies. Ultimately, the crisis spread throughout the country, with many banks and businesses declaring bankruptcy. The main reasons for the panic were the decrease in liquidity of New York banks and the loss of depositor confidence, aggravated by unregulated stock market speculation.
  The crisis was caused by an unsuccessful attempt to corner stocks in October 1907 United Copper Company.
• Panic of 1910-1911. characterized by a slight economic downturn following the implementation of the Sherman Antitrust Act. Sherman Anti-Trust Act). This mainly concerned the stock market and business traders, who were associated with the collapse Standard Oil Company.
• 1910 Shanghai Rubber Stock Market Crisis— translation note: The Shanghai rubber stock market crash was caused by shareholders of rubber manufacturing companies. In 1909, the price of rubber rose and the stock prices of companies associated with the production saw huge increases. Banks began to actively lend for the purchase of securities of rubber companies. In mid-1910, the United States adopted a policy of restricting rubber consumption and, as a result, in June, rubber prices fell on the international market, and with it, company stocks.
• 1929 stock market crash, and the subsequent Great Depression - the largest and most important economic downturn of the 20th century.
• 1973 - 1973 oil crisis- the price of oil increased sharply, resulting in the stock market crash of 1973-1974.
• Secondary banking crisis 1973-1975 in Great Britain- due to the end of the post-war reconstruction boom and the end of the rise in real estate prices.
• 1980s - Latin American debt crisis- started in Mexico in 1982 with Mexican weekend. During the 1960s and 1970s, many Latin American countries: Brazil, Argentina and Mexico, borrowed huge amounts of money from international lenders for industrialization and infrastructure programs. On a bank holiday in August 1982, Mexican Finance Minister Jesus Silva Herzog Flores flew to Washington, D.C. to declare Mexico's foreign debt unmanageable and report that his country was on the verge of default.
• Israeli banking stock crisis of 1983 During the 70s, Israeli banks began to try to control the price of shares on the Tel Aviv Stock Exchange. To this end, they recommended their clients to invest in shares of their banks. The money received from investments was used to find new clients and buy back their own shares, thereby creating the appearance of constant demand for them. In addition, banks generously provided loans to clients to continue investing in their own stocks. On October 6, 1983, Black Thursday came under pressure from sales. From October 9 to October 24, the stock exchange was closed, at which time a devaluation of 23% was carried out and shares were purchased from the population by the Bank of Israel with an average loss of 17% to 35% of the value.
• 1987 - Black Monday— the largest one-day percentage decline in stock market history. On October 19, 1987, stock markets around the world crashed, losing enormous value in a very short time. It started in Hong Kong and spread west to Europe and the US after other markets had already collapsed. The Dow Jones Industrial Average (DJIA) lost 22.61%. Due to the difference in time zones in Australia and New Zealand, this day is referred to as "Black Tuesday".
• 1989-91 — Savings and lending crisis in the United States. Commonly referred to as the S&L crisis, between 1986 and 1995, of the 1,043 to 3,234 savings and loan associations in the United States failed: the Federal Savings and Loan Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989, and Resolution The Trust Corporation (RTC) closed or otherwise resolved 747 institutions from 1989 to 1995.
• 1990 asset prices collapsed.
• early 1990s - Scandinavian banking crisis: Swedish and Finnish banking crises of the 1990s:
  — Finnish banking crisis of the 1990s was a deep systemic crisis of the entire Finnish financial sector, which occurred mainly in 1991-1993 after several years of economic boom in the late 1980s. Its total cost to taxpayers was ~8% of Finnish Gross National Product (GNP), making it the most serious of the modern Scandinavian banking crises.
  — Swedish economic model, was characterized by close cooperation between government, trade unions and corporations. The economy had extensive and universal social benefits, financed by high taxes, about 50% of GDP. In the 1980s, a financial bubble formed in the real estate market, fueled by rapid growth in lending. The restructuring of the tax system to emphasize low inflation, coupled with the international economic downturn of the early 1990s, caused the bubble to burst. Between 1990 and 1993, GDP fell by 5% and unemployment soared, leading to Sweden's worst economic crisis since the 1930s. During that time, total employment fell by almost 10%.
• early 1990s recession describes the period of economic recession affecting much of the Western world in the early 1990s. Most affected: Canada and the United States, Australia, New Zealand, Finland, Great Britain.
• 1992-93 — Black Wednesday— speculative attacks on European currencies. On 16 September 1992, the Conservative government of John Major was forced to withdraw the pound sterling from European Exchange Rate Mechanism(ERM) after it failed to keep the pound above its agreed lower limit in the ERM. In 1997, the UK Treasury estimated the cost of black media at £3.4 billion.
• 1994-95 - 1994 economic crisis in Mexico- speculation and default on Mexican debt. During the 1994 presidential election, the incumbent administration embarked on expansionary fiscal and monetary policies. The Mexican Treasury began issuing short-term debt instruments denominated in local currency with guaranteed repayment in US dollars to attract foreign investors. Mexico enjoyed investor confidence and new access to international capital after signing North American Free Trade Agreement(NAPHTHA). However, an uprising in the state of Chiapas, as well as the assassination of presidential candidate Luis Donaldo Colosio, led to political instability, causing investors to stage a capital flight of the size of one country.
• 1997-98 — 1997 — devaluation and banking crises in Asia.
• 1998 Russian financial crisis. On August 17, the Russian Government and the Central Bank announced a technical default on the main types of government securities. For the first time in world history, a state defaulted on domestic debt denominated in national currency.

The Russian banking system is bursting at the seams. Depositors are withdrawing their money from banks in droves. In January 2018 alone, individuals returned not much, not less than 453 billion rubles from their accounts. For comparison, in January last 2017, the outflow of depositors’ funds amounted to “only” 155 billion rubles. That is, negative growth by 3 times!

What are the reasons for the panic of Russian investors? What undermined the stability of the Russian financial system?

Firstly, a decrease in interest on deposits below 7% made it unprofitable to store citizens' savings in bank deposits. The current bad practice makes it unprofitable to set high deposit rates. The situation is explained by Sergei Penkin, Deputy Head of the Analytical Department of the Association of Russian Banks:

By offering interest on deposits that significantly exceed the refinancing rate set by the Central Bank, a commercial bank thereby creates additional risks for a whole chain of counterparties. The more a commercial bank exceeds the threshold established by the Bank of Russia, the more funds it transfers to the accounts of the Deposit Insurance Agency. That is, at the same time, the bank’s costs increase - both direct, for the payment of these same interests, and indirect - for various deductions

Consequently, a high interest rate in a bank is a sign that “the business smells like kerosene.”

Secondly, banks can simply take away depositors’ money on flimsy grounds.

The flight of depositors from banks began in January 2018 after the decision of the Supreme Court of the Russian Federation, according to which the bank de facto received the right not to return funds received from citizens if the financial organization had doubts about the legality of their receipt. At the same time, the Supreme Court managed not to decipher what is meant by “doubts arising,” which completely gave the greedy bankers a free hand. Well-known analyst Vyacheslav Putilovsky expresses a sound judgment on this scandalous decision:

After all, if banks really care so much about the purity of money, they, in theory, should require evidence of their origin not when the depositor demands his funds back, but when he just deposits them into his account. However, I have not heard of banks showing such scrupulousness regarding incoming transactions

Third, even the money that they managed to withdraw from banks can be taken away from depositors!

In the ill-fated January 2018, the Deposit Insurance Agency began filing lawsuits against depositors who managed to save savings from banks before they went bankrupt. The madness of the situation is that the Agency accuses citizens who were lucky enough to save their hard-earned money of colluding with bank managers, supposedly only the insider helped protect their savings from burning out. Our “independent courts” sided with the Deposit Insurance Agency, making decisions on claims in their favor. Lawyer Treshchev comments on the insanity of the situation created by the Agency:

Massive, one-size-fits-all satisfaction of the DIA's demands is an open, unscrupulous violation of the right of citizens to dispose of property. This is my money, and no one should care at what moment and for what reasons I decided to use it this way and not otherwise!

To summarize, we can conclude that the crisis and panic in the Russian financial system was created by the state itself, represented by its organizations and institutions. It won't be strange if Russians start keeping their money in a glass jar under their bed.

The crisis of the banking system forces all users of banking products - both borrowers and depositors - to think. No one is immune from the fact that the bank in which you hold an account will lose its license, and an unscrupulous creditor bank will demand full repayment of the loan ahead of time. Everyone can protect themselves from force majeure circumstances: especially for Russians, the Union of Borrowers and Investors of Russia has prepared a guide on how to act in sensitive situations.

The economic crisis makes borrowers and bank depositors think about what to do next. Nowadays, getting a recently popular and easily accessible loan has become not so easy. On the one hand, the number of loan offers from banks has significantly decreased. On the other hand, many banks refused to lend at all.

Investors should not rush to withdraw their funds

Lending conditions have also tightened significantly during the crisis. This applies to all types of loans: mortgages, car loans and consumer loans. Banks have increased down payments, extended the processing time for applications, and reduced the amount of loans provided. Compared to last year, interest rates on loans have increased quite sharply, and in some cases the rates have become prohibitive, that is, cutting off people’s desire to borrow money, and the requirements for potential borrowers have also become more stringent. And while last year there was a lending boom at this time, this fall we are seeing an obvious decline. In our opinion, the volume of mortgage lending has fallen especially sharply.

But, nevertheless, not all banks have curtailed lending due to the crisis; loans are issued. Moreover, a number of banks are seeking to use this situation for their own purposes, occupying niches previously occupied by others, luring clients of competing organizations.

The Union of Borrowers and Depositors of Russia (SZV) has prepared a guide for borrowers and depositors - how to act in a financial crisis, what to do if a bank has lost its license or does not return the deposit.

FOR BORROWERS

For those who have already taken out a loan
Make payments on time, otherwise the bank will have a reason to terminate the contract with you and demand that you repay the loan early.
Do not fall for letters from banks offering to repay some part of the loan ahead of schedule - these are just the wishes of the bank. Although, if you have a desire to support a credit institution, then this can be done.
It is best to pay at the bank's cash desk or its ATM.
Carefully check the receipts received from the bank and keep them until the loan is fully repaid.
Do not forget to sign a mutual settlement agreement with the bank after repaying the loan.

For those whose bank has been deprived of its license or, in simple words, “burned out”

First of all, you need to know that if the bank’s license is revoked, it is still necessary to pay the loan, observing all the terms of the agreement. In accordance with Art. 309 “General provisions for the fulfillment of obligations”, Article 819 “Loan agreement” of the Civil Code of the Russian Federation “the borrower must fulfill its obligations under the terms of the concluded loan agreement.” Thus, the contract is valid as long as the lender and borrower exist, which means interest and penalties may accrue. In this case, the loan turns into a monetary obligation that must be fulfilled properly.

The revocation of a license indicates that the organization has ceased to be a bank, but at the same time, your debt has not disappeared anywhere - you now owe it to another organization, on the same terms as the bank from which you took the loan.

To avoid additional problems with loan repayment, the borrower must:
1. Contact the credit institution with which the agreement was concluded and determine who is entrusted with the responsibilities of the temporary administration.
2. Suspend loan repayment through payment terminals using the previous details and clarify the new details set for accepting payments.
3. If the money “hangs up”, then penalties may follow against you.
4. If additional deposit accounts were opened at the bank, then you can discuss the issue of recalculating liabilities with the temporary administration of the bank.
5. Constantly comply with the terms of the regular payment schedule. In case of delays in loan payments, the temporary administration of the bank may require early repayment of the loan.
6. In accordance with the Civil Code of the Russian Federation, Article 327, if the creditor (bank) for one reason or another cannot accept the next payment, the borrower can deposit with the notary both the debt itself and the interest on the loan. Depositing a sum of money with a notary or court is considered fulfillment of obligations.
7. If you change your job or residential address, you must immediately notify the lender. You also need to continue to insure the mortgaged property, even if insurers increase rates.
8. Carefully study the terms of the contract. If the agreement contains a note about the possibility of the bank changing the interest rate unilaterally, then when the loan is transferred to another, “healthy” bank, there may be changes in the terms of the loan.

FOR DEPOSITORS

If you have a deposit in a bank that works normally

Depositors can be advised to once again study the terms of deposit placement more carefully and not rush into the decision to withdraw them. The optimal rate at the moment is considered to be 14-15% in rubles and 12-13% in foreign currency. But don't rush. It's better to wait a little. When the market stops being feverish, it will be possible to calmly choose suitable conditions. Moreover, any new bank deposit offer may have pitfalls. And another important note: “overly profitable” offers from financial pyramids masquerading as credit consumer cooperatives of citizens and all sorts of investment companies may soon appear. SZV Russia advises potential investors to be more vigilant and very carefully study the conditions that the financial and credit organization offers you, so as not to be left with nothing later on.

There are more attractive deposits every day. Bankers understand that people who have withdrawn money from their accounts gradually get used to the situation and begin to think about what to do. And for banks now, raising funds from the public is one of the ways to increase their “buoyancy”.

If the deposit is no more than 700 thousand rubles:
It is clearly not worth withdrawing money from the bank. Firstly, the deposit is insured, and the money will be returned in any case. Secondly, when you withdraw money from the deposit, the accrued interest is lost. If your bank is in a critical situation, it will not be corrected and you will not receive money until the bankruptcy procedure is completed. And if the bank is “alive”, then why should you lose income? Keeping money in deposits is a way to minimize losses from inflation. If you do withdraw your savings, then storing them in a safe deposit box is much safer than storing them under your pillow at home.
If you have a deposit of less than 700 thousand rubles and your bank suddenly “bursts,” then the money will still be returned to you, since the deposit is insured.
If there are several million rubles in one bank, then, as mentioned above, only 700 thousand rubles will be reimbursed.
If you have funds stored in several banks, then 700 thousand rubles will be returned to the deposit in each of the banks.

But! Unfortunately, not all deposits whose amount is less than 700 thousand rubles are subject to reimbursement.

Deposit insurance is not provided (Article 5 of the Federal Law):
1. Placed on bank accounts of individuals engaged in entrepreneurial activities without forming a legal entity, if these accounts are opened in connection with the specified activity;
2. Placed by individuals in bearer bank deposits, including those certified by a savings certificate and (or) bearer savings book;
3. Transferred by individuals to banks for trust management;
4. Placed in deposits of branches of banks of the Russian Federation located outside the territory of the Russian Federation.

If interest and deposit are not returned

The bank’s obligation to return the deposit amount is provided for in paragraph 1 of Article 834 of the Civil Code of the Russian Federation (hereinafter referred to as the Civil Code of the Russian Federation), according to which “under a bank deposit agreement, one party (the bank) has accepted what has been received from the other party (the depositor) or received for it sum of money (deposit), undertakes to return the deposit amount and pay interest on it under the conditions and in the manner prescribed by the agreement.”

In addition, in accordance with paragraph 2 of Article 837 of the Civil Code of the Russian Federation: “Under a bank deposit agreement of any type, the bank is obliged to issue the deposit amount or part thereof upon the depositor’s first request...”.

If your rights are violated, based on the above, we suggest sending an application to the bank (by registered mail with notification, which can be used as evidence of notification in court proceedings) with a request to return the deposit amount with interest.

Also, in addition to the immediate return of the deposit, you have the right to demand payment of interest and compensation for losses from the bank. “If the bank fails to fulfill the obligations provided for by law or the bank deposit agreement to ensure the return of the deposit... the depositor has the right to demand from the bank the immediate return of the deposit amount, payment of interest on it... and compensation for losses caused” (clause 4 of Article 840 of the Civil Code of the Russian Federation).

Actions of depositors in the conditions of termination of the bank's activities
First of all, you need to make sure that the bank’s license has been revoked or a moratorium has been imposed on satisfying creditors’ claims. This information is published on the websites of the Central Bank and the Deposit Insurance Agency. The DIA also has a hotline, telephone: 8-800-200-08-05 (calls within Russia are free). In two weeks you will be able to learn about the occurrence of an insured event from the media, and in a month there will be a personal notification from the Deposit Insurance Agency. A notice will be posted on the doors of a bankrupt bank with information about where and when you can get a settlement on your deposits.
You need to audit your bank accounts. If there are one or more accounts with a total amount of no more than 700 thousand rubles. (including accrued interest), then all this money will be returned to the investor. If the deposit amount exceeds the maximum amount of insurance compensation, then after payment of 700 thousand rubles, the creditor’s right of first priority to return the remaining part of the deposit is retained. That is, it is not a fact that you will receive it.
If, in addition to the deposit, you have an outstanding loan from a bankrupt bank, then the amount of compensation for deposits will be reduced by the amount of the remaining debt, taking into account accrued interest and fines.
Be sure to keep a copy of the deposit agreement. Once again, carefully study and verify the calculations that the bank offers for its debt to you. The bank may make a mistake in its calculations. The documents can be presented to the employees of the Deposit Insurance Agency, who will double-check everything.
If you are withdrawing a large amount of money, then you need to be careful, it is better to use a cashless transfer. If you have an account in another bank, then use its details; if not, open a new one.
Think in advance where to invest the money returned ahead of schedule. By viewing and analyzing the latest banking news, you can choose the best offer. The Central Bank informs which banks may soon go bankrupt.

“- rapid and massive withdrawal of deposits in one or more banks, usually leading to the collapse of the credit institution.

A banking panic may arise from a fundamental contradiction in the modern financial system: banks hold deposits that can be withdrawn immediately, but invest in assets that cannot be immediately sold (at least without significant losses). As a result, the financial position of the bank is almost always unstable, and its activities can continue only as long as depositors express confidence in the credit institution. But if a significant portion of depositors have doubts about the stability of the bank, they withdraw their deposits, which leads to a deterioration in the position of the financial institution. In turn, this causes fear among other depositors, who withdraw their deposits, further worsening the bank's position, and this continues until the bank loses the ability to return deposits and is liquidated.

One of the main dangers of a bank run is the high probability of panic spreading from one (possibly truly problematic) bank to others (possibly completely healthy). Banks are closely linked to each other by a system of mutual obligations, so the collapse of one institution (especially a large one) leads to losses for others. At the same time, due to the complexity and non-linearity of financial ties, it is not always possible to understand from the very beginning how the collapse of a bank will specifically affect its partners. In such a situation, the appearance of even unfounded rumors about losses of a particular bank associated with the victim of a bank run can cause panic among the depositors of the new bank - and further throughout the system.

The mathematical model of bank run was developed and published in 1983 by American scientists Douglas Diamond and Philip Dybvig. They came to the conclusion that the collapse of a bank could become a self-fulfilling prophecy and would not depend on the real quality of assets and the level of work of bank specialists. A rational investor who learns of the onset of panic among other investors understands that even if the credit institution is performing very well, the withdrawal of a relatively small part of the deposits will make its condition unsustainable and call into question the possibility of returning deposits in the future. Therefore, a rational investor will try to withdraw his money before others, increasing the panic with his actions, even if he himself does not want this.

See what “Banking panic” is in other dictionaries:

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PANIC- PANIC A sharp and unreasonable drop in confidence in banks and creditors, uncertainty in their ability to fulfill their obligations, accompanied by strong agitation. In Finnish history of the United States, it was more Finnish than... ... Encyclopedia of Banking and Finance

US Economy- (U.S. Economy) The US economy is the largest economy in the world, the locomotive of the world economy, determining its direction and condition. Definition of the US economy, its history, structure, elements, periods of growth and collapse, economic crises in America... Investor Encyclopedia- Stock market crisis is a sharp and sustained drop in stock prices over a short period of time. The cause of crises is the excessive swelling of fictitious capital, a strong overestimation of the real value of securities. A stock market crisis can cause... ... Wikipedia