RENEE MONTAGNE, HOST:
Finance ministers from the eurozone nations agreed over the weekend to lend Spain up to $125 billion. The aim is to keep the country's banking system from imploding and going the route of Greece, where an almost full-scale bank run is underway. NPR's Zoe Chase from our Planet Money team explains the three main ways to prevent a bank run.
ZOE CHASE, BYLINE: A run can sink a bank in an afternoon. That's why everything about a bank is designed to avoid panic. Vaulted doors, boring-looking guys in boring-looking suits with boring ties; big, solid, fancy-looking buildings; really big lobbies, so a line doesn't go out into the street. Once a bank run starts, though, there are these three ways(ph). Liaquat Ahamed is a banking historian. He says the first one, slow it down.
LIAQUAT AHAMED: One of the age-old techniques is to get people to line up and withdraw 10 cents from their bank. And if you get enough people coming in the line and just withdrawing tiny amounts, that means that the line is incredibly long and it slows it down.
CHASE: Banks once used their own employees and relatives of their employees to stand in line and count out their change. Then 5:00, boom, the bank's closed. The president of the bank would call around that night looking for cash.
AHAMED: Just when everyone's lining up the next morning, a truck pulls up with bags of gold and everyone says, oh, wonderful, there's money in the bank, and they all go home.
CHASE: That's pretty much what Roosevelt did, FDR, when the United States faced a huge run on its banks. His first act as president in March of 1933, he shut all the banks down. Then he told everyone he'd done it.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED MAN: Ladies and gentlemen, the president of the United States.
PRESIDENT FRANKLIN ROOSEVELT: My friends, I want to talk for a few minutes with the people of the United States about banking.
CHASE: While the banks were closed, Roosevelt employed the second technique: borrow money. He expanded the Federal Reserve's ability to lend money to the banks, and he shipped the new cash all over the county. Next, number three on our list of how to stop a bank run: insurance. Roosevelt created the FDIC, letters you see on the door every bank in the country today, promising that if this bank goes under, the government will pay you back.
AHAMED: And the amount they insured was tiny. It was deposits up to $2,500.
CHASE: These tactics worked. There hasn't been a nationwide bank holiday in the United States since, and the insurance rarely pays out. Today it's up to $250,000. So to recap, in order to stop a bank run, you slow it down, you borrow money, you insure deposits. Now, is any of this useful for Europe? In today's banking system, you don't have to be in the bank to make a run on it.
You can just quietly transfer money into another country, as has been going on in Greece. What about the second trick, borrowing from the Central Bank? The problem here, there is no European-wide banking regulator that the European Central Bank could work with to expand its lending powers, like there was back in Roosevelt's time. So the ECB is reluctant to do more lending that it already is. What about the last trick, insurance? In fact, Spanish bank deposits are guaranteed by the Spanish government, but...
AHAMED: In order to do that, you need to have the cash, that's the problem we have today, is that the Spanish government guarantee is looked upon by Spaniards as maybe yes, maybe no, and that's not the kind of risk you like to take with your money.
CHASE: Economist Charles Wyplosz says you've got to trust the government for a government guarantee to work. Certain broke European governments not so easy to trust. There is no European-wide deposit insurance that promises to pay you in euros no matter what. No yet, anyway. There is no one leader sitting by one big fireside to talk to one European people and say something like this.
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ROOSEVELT: You people must have faith. You must not be stampeded by rumors or guesses. Let us unite in banishing fear.
CHASE: Zoe Chase, NPR News.