Theoretically Speaking: What Would Happen If Everyone Decided to Withdraw Their Liquid Assets from the Bank Simultaneously?

Imagine the situation where everyone suddenly decided to remove their liquid assets from the bank simultaneously. Would this lead to a financial crisis? This theoretical scenario goes by the name of a “run on the money.” In reality, measures would be taken to prevent such a scenario from weakening the financial system.

Understanding a Run on Money

A run on money, similar to a run on the bank, refers to a situation where a large number of customers try to withdraw their funds from the bank at once. This can pose a significant risk to the financial stability of the bank. However, the authorities are prepared to handle such situations.

How Banks Handle a Run on Money

If a bank were to experience a run on the money, the Federal Deposit Insurance Corporation (FDIC) would intervene. The FDIC would take control of the bank, ensuring that any remaining deposits are safe and sell off the bank's assets. Even if there are no deposits left, the bank would still hold onto its loans, which could be sold to another bank at a discount. This process often occurs over the weekend and may not be immediately noticeable to the customers.

Consequences of a Run on the Banks

Should a full-scale run on the banks occur, the immediate consequence would be the depleting of cash reserves in the banking system. Banks are usually not prepared to handle such a large volume of withdrawals without any reserves. A major run across all banks would lead to their closure at some point due to a lack of currency availability.

Measures Banks would Take

Banks would adapt by focusing on taking deposits from corporate accounts only. They would implement stricter measures, such as directing customers who qualify to wait in lines for “Minimum 5000 transactions.” This practice was even common in the past.

Practical Implications for the General Public

The public would face practical repercussions, including inconveniences such as the need to carry large amounts of cash and frequent trips to pay for utilities, credit cards, and other bills. Additionally, empty ATMs would exacerbate the situation since they only hold a certain amount of cash. The average ATM holds less than $10,000, and even 20 ATMs would account for only a tiny fraction of the total available cash.

Fortunately, the actual impact would be somewhat mitigated. The total amount of cash in ATMs worldwide, although significant, is still limited. Consequently, the simultaneous withdrawal of all liquid assets from banks would not result in a complete collapse of the financial system. The FDIC might step in to cover some withdrawals, with any excess over the insured limit potentially only partially paid.

In conclusion, while a theoretical run on the money could lead to significant disruptions, the financial system has measures in place to mitigate such situations. However, the practical implications for individuals could be significant, leading to inconvenience and financial stress.

Keywords: bank run, liquid assets withdrawal, FDIC, financial collapse, banking crisis