Three Ways To Stop A Bank Run : Planet Money On today's show, we walk through the three things you can do to stop a bank run — and figure out what options are left for Europe.
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Three Ways To Stop A Bank Run

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Three Ways To Stop A Bank Run

Three Ways To Stop A Bank Run

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ROBERT SMITH, HOST:

Hello, and welcome to PLANET MONEY. I'm Robert Smith.

ZOE CHACE, HOST:

I'm Zoe Chace. Today is Tuesday, June 5. And we're coming to you today from a laundromat in the Bronx. We're actually standing right next to Robert Ortiz, who's folding his clothes.

ROBERT ORTIZ: To me, it's just a typical laundromat. There are several in the area, but this is the one I particularly come to.

SMITH: This is not the typical laundromat because 100 years ago, this was a bank. The Bronx branch of the Bank of the United States. In fact, if you go outside, you can still see the remnants of the letters on the outside of the building. We hear that there are actual vaults in the back.

CHACE: This was actually the site of a huge bank run that set off a series of bank runs during the Great Depression. It happened right here, and it was kind of a fluke, actually. One of the depositors had shares in the bank, and he was having trouble getting his money back. He came out onto the corner of Southern Boulevard and Freeman Street. And he said to everybody around, the bank's in trouble. Before you knew it, there was a line out the door, then a crowd, then a riot. Then the police came on horseback.

SMITH: But even that didn't stop the bank run. Once these things start, they take on a life of their own. The bank of the United States closed, then failed. And now 80 years later, the only money people trust this place with is the change machine in the back.

(SOUNDBITE OF A FLOCK OF SEAGULLS SONG, "I RAN")

CHACE: Today on the show - bank runs and how to stop them.

(SOUNDBITE OF A FLOCK OF SEAGULLS SONG, "I RAN")

SMITH: Right now we're seeing the beginnings of another series of bank runs. This time, it's 2012. Bank runs are in Athens. And it looks a lot different from that corner in the Bronx. People don't line up anymore. Greek depositors just pick up the phone, call their teller.

THEOPHILUS PAPAKASTAKIS: You know what they do? They call me, and they say, Theophilus, tomorrow, I'm going to need, say, 50,000 euros cash. I say, maybe a cashier's check? No, no. Cash. OK. And then half an hour later, somebody else will say, Theophilus, I need, say, 200,000 euros.

CHACE: That's Theophilus Papakastakis. He's a bank teller in Athens. Chana Joffe-Walt met him when she was out reporting there last year, and she talked to him again the other day. And he said, people know that what they're doing isn't good for the bank, but they can't help themselves.

PAPAKASTAKIS: The funny thing is some of them are apologetic. Like, you know, I'm sorry I take the money. But, you know, I'm so scared.

SMITH: What they're scared of is that Greece is going to leave the euro. And when Greece leaves, all their money in Greek banks will be converted to something not worth as much, maybe to the old drachma. As you may know from bank runs, pulling out your money actually makes everything worse. And Theophilus wasn't sympathetic.

PAPAKASTAKIS: I felt very bad, and I was angry at them. I was pissed. I was troubled. I was talking to my - the branch manager. And he says, what do we do about that? I don't like it. I don't want to do it. Just do your job. Be cool. It's their money. They can do it.

SMITH: It's all legal. It's all logical. And it's slowly killing Greece.

CHACE: And you know what? As he sits there every day in his window, handing out bundles of euros, helping people transfer their money out of the country, you got to ask.

CHANA JOFFE-WALT, BYLINE: Have you taken your money out?

PAPAKASTAKIS: I don't have any (laughter) money at all. And, you know, sometimes, I - I'm wondering, what if I had 100,000 euros? Would I do the same? I probably would.

CHACE: Yeah, this is a big problem when your bank teller is considering moving his money out of the bank.

SMITH: And it's happening in banks all over Greece. In just one day last month - one day - Greek depositors withdrew 700 million euros from the country's banks.

CHACE: And if it keeps accelerating, it'll be hard for Greece's banking system to survive. Here's why - you put your money in the bank. That money gets loaned out to other people. It's not sitting in the vault, waiting for you. And if everybody comes to withdraw their money at the same time, there's just not enough cash.

SMITH: And in Greece, they have an even bigger problem because those banks - they took their depositors' money, and they loaned it to the government of Greece. The government, which, if you've been following the news, you know, is a deadbeat. The Greek government can't pay it back to its own banks.

CHACE: And this being Europe, it's never just Greece. In fact, depositors in Spain are watching the bank run in Greece and pulling out their own money.

SMITH: So we can see this bank run coming. What do we do to stop it?

CHACE: Well, it's all about psychology. Banks have known for a long time that a bank run could sink them in an afternoon. So everything a bank does is about creating a psychological feeling that your money is safe. There's big vault doors. There are sober guys in suits and ties.

DOUGLAS DIAMOND: The story was make sure your lobby is very big, so if the tellers are a little slow, the line doesn't go out into the street.

SMITH: Absolutely.

CHACE: That's a thing?

DIAMOND: Yes. If the line would go out into the street, pretty soon, the line would get very long because everybody would pull their car over and get into the line.

SMITH: Douglas Diamond is an economist at the University of Chicago who has studied the psychology of bank runs. But as we talked to him, he told us if these psychological tricks don't work, if a bank run starts, there are really only three ways to stop it - three ways.

ZOE CHACE, HOST:

Liaquat Ahamed is a financial historian. He wrote this great book "Lords Of Finance." And he's going to talk us through those three ways - how to stop a bank run in progress.

SMITH: Number one, slow it down.

LIAQUAT AHAMED: The key way to stop a bank run bringing down a bank is to buy yourself time. And one of the age-old techniques is to get people to line up and withdraw, you know - I don't know - 10 cents from their bank. And if you get enough people coming in line and just withdrawing tiny amounts, that means that the line is incredibly long. And it slows it down. And there are a couple of stories from the 19th century where banks would use these techniques to sort of, if you like, buy themselves time while they got cash.

SMITH: So they would use what? Bank employees or friends and family to stand...

AHAMED: Yeah, exactly.

SMITH: ...In line?

AHAMED: Get bank employee, yeah, yeah. You get bank employees to get in line.

SMITH: And to carefully count out their pennies? One, two, three...

AHAMED: Yeah, yeah, exactly (laughter). That's exactly it.

SMITH: And then next thing you know, it's 5 o'clock. Bank's closed and...

AHAMED: And they have to close. Yeah. And everyone has to come back the next day. And meanwhile, you know, the president of the bank can call around and find, you know, someone who has confidence in him who'll lend him a couple of million dollars. And then, you know, the - just when everyone is 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 the whole line go - they all go home.

CHACE: But if that doesn't work, if you stall and stall, and people are still demanding their money - number two, borrow money from somewhere.

SMITH: Remember those bank runs during the Depression that started up at that bank in the Bronx? This is how Franklin Delano Roosevelt would have stopped them. He needed to buy himself a little time first.

AHAMED: When Roosevelt took office in 1933, the first thing he did was close every bank in the country, and that really was the first thing he did. And banks were closed for the first 10 days of the Roosevelt banking - of the Roosevelt administration.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN: Ladies and gentlemen, the president of the United States.

FRANKLIN D. ROOSEVELT: My friends, I want to talk for a few minutes with the people of the United States about banking - to talk with the comparatively few who understand the mechanics of banking but more particularly with the overwhelming majority of you who use banks for the making of deposits and the drawing of checks. I want to tell you what has been done in the last few days and why it was done and what the next steps are going to be.

SMITH: Those next steps involved the Federal Reserve, the Fed, the central bank of the United States. The job of the Fed is to support the banking system, to print money to make emergency loans. But the Great Depression - that was new. The Fed had never encountered anything on this kind of scale before. So FDR, while the banks were closed - he beefed up the Federal Reserve. He expanded their ability to make loans. And most importantly, he told the American people that he was going to do this. He said, the money is on the way. We are sending the loans out to the banks.

(SOUNDBITE OF ARCHIVED RECORDING)

ROOSEVELT: You people must have faith. You must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work. It is your problem, my friend. Your problem no less than it is mine. Together, we cannot fail.

CHACE: That stopped the run. And as the banks opened over the next couple of weeks, people lined back up in front. But this time, they were putting their money back in.

SMITH: There's one more thing that Roosevelt did, number three on our list of how to stop a bank run. Although this one is more to prevent a future bank run, the third way is deposit insurance. You now see it on the door of every bank in America, FDIC - a whole new agency that provides insurance to bank accounts. Banks pay into a government fund. And should a bank go under, the government will pay you back.

AHAMED: And the amount they insured was tiny. I think the minimum the deposit insurance was brought in for deposits up to $2,500.

CHACE: That worked, too. The FDIC has never lost money. There's never been a bank run like the bank run of the Great Depression again in the United States.

SMITH: So to recap, in order to stop a bank run, you have to, one, slow it down, two, borrow money, three, insure your bank's deposits. Now, is any of this useful for Europe?

CHACE: Well, we can get the first one out of the way. Slowing down a bank run is tough these days. The age-old tricks of putting your relatives in line to make the lines longer or paying people out in pennies - that's not going to work today. Remember Theophilus, our Greek bank teller. Depositors at his bank are not standing in line. They're calling him on the phone and doing electronic transfers. And his manager says, well, you have to give them what they want, or they'll freak out even more.

SMITH: OK. We've got to move on to our second trick, borrow. The banks in Greece could borrow a bunch of money in order to have it available for when people ask for their deposits back, but there's a problem. Private investors, you probably heard - they don't want to lend money to Greek banks anymore. In fact, they don't even want to lend to Spanish banks anymore. So the banks - they turn to their government for help. Another problem - the governments in Europe, at least southern Europe, are broke. Charles Wyplosz is an international economist. He's been looking at these problems for years.

CHACE: And, by the way, he's Swiss.

CHARLES WYPLOSZ: There is no government money anywhere that can come to that level to guarantee these debts, whereas the ECB can produce that much, twice that much, 10 times that much. So that's why central banks are called lender of last resort, because when push comes to shove, and everything else is crumbling, they are the folks that can create the money.

CHACE: There is a lender of last resort in Europe, the European Central Bank. And the ECB has been lending out a lot of money to these European banks. In Greece in particular, they're keeping the banks on life support. Problem is Europe is a big place with lots and lots of banks, and each country makes the rules for their particular banking system. So the ECB, the ones with all the money - they're not entirely sure who to trust. There is no central regulator that the ECB can work with. So the ECB is a little hesitant to lend all this money out. There's no one person for them to coordinate with to make sure these banks get their act together.

SMITH: We're checking these off quickly. We need to move to number three, the third tried and true method, deposit insurance. Believe it or not, countries in Europe, even Greece, already have deposit insurance.

WYPLOSZ: OK. Under normal conditions, a bank run can be stopped when the government guarantees all deposits at all banks.

SMITH: That sounds easy. Why don't we do that?

WYPLOSZ: OK. In order to do that you need to have the cash. In the case of Greece, there are two complicated factor. The Greek government is bankrupt, so the Greek government guarantee's not really exciting. And the cash has to come from the ECB, which is not under orders of the Greek government. So, practically, the Greek government cannot issue such a guarantee.

CHACE: The Greek government says, relax. We have your deposits insured. You've got nothing to worry about. The Greek depositors say, but what will you insure them with? Greek government, you have no money.

SMITH: The same thing is true in Spain.

WYPLOSZ: And 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.

SMITH: You've got to trust the government for a government guarantee to work. So right now in Europe, they're talking about a new kind of deposit insurance - not a deposit insurance for each individual country but one for the entire eurozone, an FDIC for Europe that promises, you know what? We insure your deposits in Euros, no matter what happens to your particular country. But like everything in Europe - and we do this over and over again on PLANET MONEY and our shows - to do a massive program like that requires massive coordination.

CHACE: But as you know, there is no central leader of all of Europe that could just go sit down by a big, grand European fireplace and chat to the continent as one people. That's the problem. There's no one in Europe that can say this.

(SOUNDBITE OF ARCHIVED RECORDING)

ROOSEVELT: You people must have faith. You must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up you to support and make it work. It is your problem, my friend. Your problem no less than it is mine. Together, we cannot fail.

(SOUNDBITE OF SONG, "I RAN")

A FLOCK OF SEAGULLS: (Singing) I just ran. I ran all night and day. Couldn't get away.

SMITH: We'd love to hear what you think of today's show. Shoot us an email - planetmoney@npr.org. Or if you are not already listening to this show on the PLANET MONEY app for the iPhone, then you should get it right now. Go to the App Store on the iPhone and download PLANET MONEY. You'll be able to listen to our full episodes, our radio stories, surf all of our great and entertaining blog posts. It is fantastic. I guarantee it. I'm Robert Smith.

CHACE: And I'm Zoe Chace. Thanks for listening.

(SOUNDBITE OF SONG, "I RAN")

A FLOCK OF SEAGULLS: (Singing) Aurora borealis comes in view. Aurora comes in view. And I ran. I ran so far away. I just ran. I ran all night and day. Couldn't get away.

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