What is a Bank Crisis?

A bank crisis occurs when bank customers start to withdraw large amounts or all of the money they have deposited with the bank at once. Since the bank operates with profits from using the money that consumers have as deposits with the bank, when a large amount of customers remove this money from the bank, it causes the bank to have financial problems that can lead to the bank failing.

Collectively, when there are withdrawals of this kind taking place in numerous banks, the bank crisis spreads. Since the banks in the U.S. are part of a banking system, all of these banks are interconnected, even borrowing money from each when necessary. As the bank crisis spreads from bank to bank, then this causes a banking crisis to spread across the nation. In turn, this can even cause a global banking crisis because U.S. banks work with banks spread around the globe.

Typically, what causes a banking crisis is an uncertainty in the minds of the consumers or banking customers. An uncertainty in the economic status of the country or the stock market causes consumers to run to their banks, withdraw all of their money and store it at home to avoid losing the money altogether. In some cases, it is lack of confidence in the bank itself because customers are scared that the bank is in danger of failing.

During the recession in the U.S. that began in 2007, bank failures became a common and even daily occurrence. It was a vicious circle for the banks and bank customers. Mortgage foreclosures were causing the banks' numerous financial problems. As more and more banks were in danger of closing, customers made runs on the banks to pull all of their money out of the bank.

This perpetuated the problem because now banks did not have any money on hand to make new loans. Not being able to make new loans prohibited the banks from producing new business and turning a profit from the loan interest. With no deposits and no loans, the banks were forced to close. During the 2007 to 2010 period, bank after bank experienced these kinds of problems, causing many to be closed and seized by the Federal Deposit Insurance Corp. (FDIC).

After the bank crisis spread throughout the nation, international banks underwent their own bank crisis. Overall, a bank crisis turns into a financial crisis when it becomes a widespread problem. Since a banking institution offers more to the economy than simply managing checking and savings accounts, when multiple banks have problems, it spreads into multiple areas of the financial world.