<p>Historically, banks would take deposits, telling depositors that they could withdraw their deposits upon demand. The bank would then take these deposits, combine them with with the equity of the bank's owners, and extend long term term loans to business, governments, and home owners. Under normal circumstances, this is a nice business model, <a href="http://www.investopedia.com/terms/1/3_6_3_rule.asp" rel="nofollow noreferrer">give 3% interest on depositors' accounts, lend the depositors money at 6% interest and then be playing golf at 3pm</a>. You pocket the difference between the deposit rate and the lending rate and live in Connecticut or Luxembourg.</p>

<p>The problem is those pesky depositors. Because they know that the bank has tied up most of their money in these illiquid long term loans, they can't possibly pay everyone back if they all show up to demand their money on short notice. Under normal circumstance they have no reason to show up and demand all their money back. But if there are <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2005.00762.x/abstract?deniedAccessCustomisedMessage=&amp;userIsAuthenticated=false" rel="nofollow noreferrer">inklings that the bank has lost money on its loans</a>, or even just that <a href="http://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model" rel="nofollow noreferrer">you've heard that other people are thinking about pulling their money out</a>, you can have this in no time:
<img src="https://i.sstatic.net/B7OlQ.jpg" alt="Berlin 1931 bank run"></p>

<p>So what is different when deposits aren't cash but instead are electronic? Nothing of substance. The bank still has the vast majority of its liabilities invested in illiquid assets, in America usually mortgage and commercial loans. The bank still must pay on demand in cash or electronic bank transfer. If it doesn't have enough electronic cash, it has to find people who will pay cash for their assets or lend against them.</p>

<p>I think what confuses @user2832080 is that false assumption that the problem is "how much cash is in the ATMs" when in fact it is "how much cash / deposits in other banks / readily marketable securities the bank can get a hold of on short notice" A bank could be able to give all the money by ATM that people want but still have not nearly enough to pay the electronic transfer requests. A bank could have run out of cash in the ATMs (as <a href="http://www.nydailynews.com/new-york/queens/atm-shortage-rockaways-article-1.1202177" rel="nofollow noreferrer">happens from time to time around natural disasters</a>) but have plenty of liquidity to pay out transfer requests. </p>

<p>All of which may sound odd to the lay reader. I recommend Richard Brown's article: <a href="http://gendal.me/2013/11/24/a-simple-explanation-of-how-money-moves-around-the-banking-system/" rel="nofollow noreferrer">A Simple Explanation of How Money Moves Around the Banking System</a> for a nice overview of how you don't need cash to affect transfers between institutions. The key idea is that banks have cash on hand, they have cash balances at other banks, and a limited amount of marketable liquid assets (like government bonds). If the demands to return deposits exceed those values, the bank is having a run, with or without the lines out front.  </p>

CC BY-SA 3.0
2015-02-07T00:34:22.363Z
2015-02-15T00:28:04.223Z
2015-02-15T00:28:04.223Z
BKay
<p>What you describe is the "traditional" bank-run.  </p>

<p>The 2008 incident you refer to, was called an "electronic bank run", because the problem was not caused by people trying to get tangible paper money in their hands in excess of the actual paper money available to the banks.  </p>

<p>The problem was that through electronic banking and electronic wire-transfer orders "funds were redirected out of the U.S. money markets" as one account of the incident puts it.  </p>

<p>So why is this a problem? </p>

<p>Because under "fractional banking", <em>electronic money functions exactly as paper money</em>. You work, and your employer pays your salary through a wire transfer. You go buy something and you pay with your debit card, where you transfer electronic money from your account to the shop's account.  </p>

<p>In other words, electronic money, once created, <em>is as much actual purchasing power as paper money is.</em> It is <em>wealth</em>.</p>

<p>But this means that this "electronic bank run" was <em>impoverishing</em> the US banking system. But since the transfers were electronic, by necessity they went out of the US economy also -to some bank accounts in other countries.  It was <em>wealth going out of the US economy</em>, not just paper money going out of the banks but still <em>in</em> the economy -and at a speed and volume unimaginable in the old days, due to the wonders of the internet and digital technology.  </p>

<p>So essentially, it is a totally <em>different</em> kind of problem (and more serious) than the "traditional" bank run, so it should perhaps have been characterized by using another term.</p>

CC BY-SA 3.0
2015-02-06T11:50:06.883Z
Ah it makes sense that it is a totally different situation. So the way I understand it, the electronic bank run needs a lot lot more money out of a banking system than a traditional bank run with paper money. Since you are a greek (I presume), what do you think about greece and the danger of a bank run? I had guessed it was in the traditional sense, is it an electronical bank run as well?
user2832080
CC BY-SA 3.0
2015-02-06T12:34:14.427Z
What to keep in mind is that "electronic" bank run, means wealth out of the economy, not just money out of the banking system. As for your question about Greece's current affairs, well, that should be posted as a new question here.
Alecos Papadopoulos
CC BY-SA 3.0
2015-02-06T13:55:57.670Z
Fair enough I might make a different question. Another thing is if someone had 1 billion in a bank that didn't use. They were just dead money in the bank, no investments etc. If he electronically transferred them in another country would that have in effect in the economy of the original country? I would guess since those money weren't actually moving into the economy that it would make no difference but it doesn't sound right.
user2832080
CC BY-SA 3.0
2015-02-06T14:20:02.983Z
There is general disagreement with the position that money is net wealth. See Barro (1974), Are Government Bonds Net Wealth? I also believe that it is inaccurate that electronic bank withdrawals by "...necessity they went out of the US economy". A bank run can happen because bank obligations like deposits are cancel-able on demand, while bank assets are illiquid. They have some liquid reserves, but if too many deposits are called at once, there is not enough to go around. That does not depend on the deposits being called for paper currency.
BKay
CC BY-SA 3.0
2015-02-06T14:41:37.050Z
@BKay Barro's paper relies on Ricardian Equivalence, and Ricardian Equivalence has been repeatedly shown not to hold in practice. I am not sure I follow the second pat of your comment, so it would be interesting to expand it in an answer. Regarding the specific incident though, what information I found was describing wire transfers sending funds abroad.
Alecos Papadopoulos
CC BY-SA 3.0
2015-02-06T14:43:36.517Z
@user2832080 No, sitting-duck funds still are important because the bear the _potential_ of being used, which is important for assessing the future, and hence affect current decisions.
Alecos Papadopoulos
CC BY-SA 3.0
2015-02-06T14:55:02.170Z
Doesn't have to be Ricardian equivalence. If you believe that the supply of money is neutral in the long run you don't believe that money is wealth.
BKay
CC BY-SA 3.0
2015-02-06T20:39:29.797Z
@BKay I totally agree with you, since you used the magic word: long-run. In the short run though, things may function differently, and certainly very abrupt and large changes can have lasting effects if the other parts of the system cannot adjust equally quickly. And I believe this is the case here. I still believe the second part of your first comment would be a valuable full answer to the question.
Alecos Papadopoulos
CC BY-SA 3.0
2015-02-07T14:04:28.553Z
-1 this answer is simply incorrect, bkay has it right.  It has nothing to do with wealth leaving. A bank must maintain reserve with the fed.  These reserves are electronic money. The reserves get transfered to another bank during wire transfers. Too many electronic transfers and the bank runs out of reserves. Bank run.
Corvus
CC BY-SA 3.0
2015-02-07T16:11:18.387Z
@Corone It is my impression that you do not take into account what we are explaining here -which is a specific incident that happened in US in 2008, During this incident it was massive in value wire transfers not from one US bank to another US bank, but from US banks _to banks abroad_. This _creates_ a wealth effect in the short run at the macroeconomic level. If they were transfers from one US bank to another US bank, then you would have a bank run related to a specific institution, indeed,  but not with respect to the whole US banking system and so to the US economy.
Alecos Papadopoulos
CC BY-SA 3.0
2015-02-07T18:07:36.633Z
Maybe the question needs changing then. Washington mutual, bear stearns and wachovia were all taken out by electronic 'silent' runs in 2008. Transfers to other banks.
Corvus
CC BY-SA 3.0
2015-02-06T05:18:22.313Z
2015-02-06T05:18:22.313Z
Alecos Papadopoulos
<p>I read that at 2008 there was an electronic bank run.</p>

<p>From what I undestand bank runs occur due to the fractional reserve banking system. The actual real money you can hold on your hand are a fraction of the total money in banks. So if everyone goes to ATM and gets the money in their hand, it means that the bank runs out of the "real money" and people can't withdraw these "real money".</p>

<p>So if the same number of people, instead of withdrawing from the ATMs, do electronic transactions that eg get their money from a bank to another bank (or any other institution) how can there be a bank run? It just doesn't make sense to me.</p>

CC BY-SA 3.0
2015-02-07T14:09:21.793Z
Think of it like this. All banks have reserves with the fed. Think of the reserves as fed promise to provide notes on demand. These reserves are what moves in electronic transfers. Run out of reserves is the same as run out of cash.
Corvus
CC BY-SA 3.0
2015-02-15T02:37:15.060Z
Could you explain bit more why you think electronic bank runs would be different to paper runs, as that will help the answerers? Money's money, regardless of whether it's paper, metal or electronic. A bank can only return to depositors what it holds: if it's lent it out elsewhere, it can't at the same time return it to the depositors, without raising additional funding elsewhere.
410 gone
<banking>
How can there be an electronic bank run?
user2832080
# How can there be an electronic bank run?

(Asked by: username_0 on 2015-02-05)

I read that at 2008 there was an electronic bank run.

From what I undestand bank runs occur due to the fractional reserve banking system. The actual real money you can hold on your hand are a fraction of the total money in banks. So if everyone goes to ATM and gets the money in their hand, it means that the bank runs out of the "real money" and people can't withdraw these "real money".

So if the same number of people, instead of withdrawing from the ATMs, do electronic transactions that eg get their money from a bank to another bank (or any other institution) how can there be a bank run? It just doesn't make sense to me.

**Tags:** banking

> **Comments:**
> **username_1**: Think of it like this. All banks have reserves with the fed. Think of the reserves as fed promise to provide notes on demand. These reserves are what moves in electronic transfers. Run out of reserves is the same as run out of cash.  
> **username_2**: Could you explain bit more why you think electronic bank runs would be different to paper runs, as that will help the answerers? Money's money, regardless of whether it's paper, metal or electronic. A bank can only return to depositors what it holds: if it's lent it out elsewhere, it can't at the same time return it to the depositors, without raising additional funding elsewhere.  

---

## 2 answers

### Answer by username_4 on 2015-02-06. Score: 4 | Accepted answer

What you describe is the "traditional" bank-run.

The 2008 incident you refer to, was called an "electronic bank run", because the problem was not caused by people trying to get tangible paper money in their hands in excess of the actual paper money available to the banks.

The problem was that through electronic banking and electronic wire-transfer orders "funds were redirected out of the U.S. money markets" as one account of the incident puts it.

So why is this a problem?

Because under "fractional banking", *electronic money functions exactly as paper money*. You work, and your employer pays your salary through a wire transfer. You go buy something and you pay with your debit card, where you transfer electronic money from your account to the shop's account.

In other words, electronic money, once created, *is as much actual purchasing power as paper money is.* It is *wealth*.

But this means that this "electronic bank run" was *impoverishing* the US banking system. But since the transfers were electronic, by necessity they went out of the US economy also -to some bank accounts in other countries. It was *wealth going out of the US economy*, not just paper money going out of the banks but still *in* the economy -and at a speed and volume unimaginable in the old days, due to the wonders of the internet and digital technology.

So essentially, it is a totally *different* kind of problem (and more serious) than the "traditional" bank run, so it should perhaps have been characterized by using another term.

> **Comments:**
> **username_0**: Ah it makes sense that it is a totally different situation. So the way I understand it, the electronic bank run needs a lot lot more money out of a banking system than a traditional bank run with paper money. Since you are a greek (I presume), what do you think about greece and the danger of a bank run? I had guessed it was in the traditional sense, is it an electronical bank run as well?  
> **username_4**: What to keep in mind is that "electronic" bank run, means wealth out of the economy, not just money out of the banking system. As for your question about Greece's current affairs, well, that should be posted as a new question here.  
> **username_0**: Fair enough I might make a different question. Another thing is if someone had 1 billion in a bank that didn't use. They were just dead money in the bank, no investments etc. If he electronically transferred them in another country would that have in effect in the economy of the original country? I would guess since those money weren't actually moving into the economy that it would make no difference but it doesn't sound right.  
> **username_3**: There is general disagreement with the position that money is net wealth. See Barro (1974), Are Government Bonds Net Wealth? I also believe that it is inaccurate that electronic bank withdrawals by "...necessity they went out of the US economy". A bank run can happen because bank obligations like deposits are cancel-able on demand, while bank assets are illiquid. They have some liquid reserves, but if too many deposits are called at once, there is not enough to go around. That does not depend on the deposits being called for paper currency.  
> **username_4**: @username_3 Barro's paper relies on Ricardian Equivalence, and Ricardian Equivalence has been repeatedly shown not to hold in practice. I am not sure I follow the second pat of your comment, so it would be interesting to expand it in an answer. Regarding the specific incident though, what information I found was describing wire transfers sending funds abroad.  
> **username_4**: @username_0 No, sitting-duck funds still are important because the bear the _potential_ of being used, which is important for assessing the future, and hence affect current decisions.  
> **username_3**: Doesn't have to be Ricardian equivalence. If you believe that the supply of money is neutral in the long run you don't believe that money is wealth.  
> **username_4**: @username_3 I totally agree with you, since you used the magic word: long-run. In the short run though, things may function differently, and certainly very abrupt and large changes can have lasting effects if the other parts of the system cannot adjust equally quickly. And I believe this is the case here. I still believe the second part of your first comment would be a valuable full answer to the question.  
> **username_1**: -1 this answer is simply incorrect, username_3 has it right.  It has nothing to do with wealth leaving. A bank must maintain reserve with the fed.  These reserves are electronic money. The reserves get transfered to another bank during wire transfers. Too many electronic transfers and the bank runs out of reserves. Bank run.  
> **username_4**: @Corone It is my impression that you do not take into account what we are explaining here -which is a specific incident that happened in US in 2008, During this incident it was massive in value wire transfers not from one US bank to another US bank, but from US banks _to banks abroad_. This _creates_ a wealth effect in the short run at the macroeconomic level. If they were transfers from one US bank to another US bank, then you would have a bank run related to a specific institution, indeed,  but not with respect to the whole US banking system and so to the US economy.  
> **username_1**: Maybe the question needs changing then. Washington mutual, bear stearns and wachovia were all taken out by electronic 'silent' runs in 2008. Transfers to other banks.  

---

### Answer by username_3 on 2015-02-07. Score: 4

Historically, banks would take deposits, telling depositors that they could withdraw their deposits upon demand. The bank would then take these deposits, combine them with with the equity of the bank's owners, and extend long term term loans to business, governments, and home owners. Under normal circumstances, this is a nice business model, [give 3% interest on depositors' accounts, lend the depositors money at 6% interest and then be playing golf at 3pm](http://www.investopedia.com/terms/1/3_6_3_rule.asp). You pocket the difference between the deposit rate and the lending rate and live in Connecticut or Luxembourg.

The problem is those pesky depositors. Because they know that the bank has tied up most of their money in these illiquid long term loans, they can't possibly pay everyone back if they all show up to demand their money on short notice. Under normal circumstance they have no reason to show up and demand all their money back. But if there are [inklings that the bank has lost money on its loans](http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2005.00762.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false), or even just that [you've heard that other people are thinking about pulling their money out](http://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model), you can have this in no time:
![Berlin 1931 bank run](https://i.sstatic.net/B7OlQ.jpg)

So what is different when deposits aren't cash but instead are electronic? Nothing of substance. The bank still has the vast majority of its liabilities invested in illiquid assets, in America usually mortgage and commercial loans. The bank still must pay on demand in cash or electronic bank transfer. If it doesn't have enough electronic cash, it has to find people who will pay cash for their assets or lend against them.

I think what confuses @username_0 is that false assumption that the problem is "how much cash is in the ATMs" when in fact it is "how much cash / deposits in other banks / readily marketable securities the bank can get a hold of on short notice" A bank could be able to give all the money by ATM that people want but still have not nearly enough to pay the electronic transfer requests. A bank could have run out of cash in the ATMs (as [happens from time to time around natural disasters](http://www.nydailynews.com/new-york/queens/atm-shortage-rockaways-article-1.1202177)) but have plenty of liquidity to pay out transfer requests.

All of which may sound odd to the lay reader. I recommend Richard Brown's article: [A Simple Explanation of How Money Moves Around the Banking System](http://gendal.me/2013/11/24/a-simple-explanation-of-how-money-moves-around-the-banking-system/) for a nice overview of how you don't need cash to affect transfers between institutions. The key idea is that banks have cash on hand, they have cash balances at other banks, and a limited amount of marketable liquid assets (like government bonds). If the demands to return deposits exceed those values, the bank is having a run, with or without the lines out front.


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