Reducing Bank Run Risk with Proactive Communication
“The current [banking] crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come,” said Jamie Dimon , JPMorgan Chase’s CEO. One of those repercussions may be the financial health of small banks, as consumers rush to withdraw funds due to concerns about the safety of their money. Bank leaders need to take active steps to build customer confidence and trust, and to reduce the risk of a bank run.
Distrust in Banks Isn’t New
Consumer trust in banks was declining even before the Silicon Valley Bank collapsed on March 10. According to Forrester’s 2022 US Banking Customer Experience Index, customer trust in banks dropped for the first time since 2018. Forrester predictions for 2023 included this one: “Banks will lose consumer trust during economic turmoil.” A Forrester analyst wrote. “As the economy continues to flash warning signals, consumers’ ire and resentment toward their bank will make it even harder to earn trust, so for most brands, trust will decline.”
Impact of the Banking Crisis on Customer Trust—and Bank Health
The recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank have created anxiety even for people who don’t keep their money at those institutions. Consumers, workers and small business owners are now even more concerned about the financial system and the economy as a whole. Doubts about relatively healthy banks can create panicky behavior that becomes a self-fulfilling prophecy. A bank run (i.e., a large number of simultaneous withdrawals) can create major problems, forcing banks to quickly sell assets, often at a loss, to meet depositors’ demands for cash. These losses can drive a bank into insolvency.
Customers who lack confidence in their bank may reevaluate their choice, shopping around for a “safer” option. They may flee for a bigger bank, perceiving they’ll find greater security there. Deposits at small U.S. banks fell by a record amount ($119 billion ) the week after Silicon Valley Bank collapsed. Even larger banking and financial service institutions face operational and market risks.
A recent report revealed that 186 banks are at risk of “impairment” of $300B worth of insured deposits. A bank run on one of those banks could cause a ripple effect leading to a recession or a broader financial and widespread banking crisis.