Research finds bank insolvency, not depositor panic alone, drives systemic crises and economic damage.
New York Fed research concludes that bank runs escalate into failures only when institutions have poor underlying fundamentals. The study, based on an AI-powered database of U.S. historical bank runs, found no evidence that small shocks trigger widespread panics without weak bank health as a precondition.
The findings challenge the notion that runs alone cause systemic distress. Researchers analyzed millions of digitized newspaper pages to build the most comprehensive dataset of U.S. bank runs, emphasizing that insolvency is a necessary condition for runs to devastate the banking system and broader economy.
The study underscores that while runs can occur in both strong and weak banks, only those with poor fundamentals face collapse. The research aims to refine understanding of financial stability risks and crisis triggers.