NEW YORK, July 7 (Reuters) – Bank runs turn into bigger problems when financial institutions’ broader underlying health is under challenge, new research from the New York Federal Reserve showed on Tuesday.
Data offer “little support” for the idea that small shocks can generate “widespread” banking panics, New York Fed researchers wrote in a blog posting.
“Poor bank fundamentals are necessary for bank runs to translate into failure and for bank distress to generate severe economic distress,” the research said, adding that “although runs can occur in both weak and strong banks, poor fundamentals are necessary for runs to result in bank failures.”
The researchers noted that their findings are based on a new database powered by artificial intelligence. “We use large language models … to extract information on bank runs from millions of digitized historical newspaper pages, creating the most comprehensive database of bank runs in U.S. history,” they said.
The blog noted the importance of properly understanding bank runs, where declining confidence in an institution drives depositors to try to recover their deposits en masse. “Runs should thus be seen as a trigger for bank failures and crises, but insolvent banks are necessary for this trigger to devastate the banking system and the economy,” they wrote.
(Reporting by Michael S. Derby; Editing by Paul Simao)
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