New York Fed research shows financial institutions’ health is key to bank runs, not panic

Banks don’t actually collapse because someone yells “fire” in a crowded lobby. They collapse because the building was already on fire.

That’s the core finding from a new research paper published by the New York Federal Reserve, which analyzed more than 3,000 US bank runs spanning from 1863 to 1934. The conclusion is deceptively simple: the fundamental health of a financial institution is the primary factor determining whether a bank run actually leads to failure and broader economic damage.

What the research actually found

The New York Fed researchers built a new database using near-universal newspaper records of bank runs during the National Banking Era and the Great Depression. They cross-referenced those records with balance sheet data and macroeconomic conditions to paint a comprehensive picture of what actually drives banking crises.

While bank runs can technically happen at both financially weak and robust institutions, it’s the ones with poor fundamentals that actually fail. The study found little evidence supporting the popular theory that minor shocks can trigger widespread banking panics.

This matters because the period studied, 1863 to 1934, predates federal deposit insurance. These were bank runs happening in a financial system with essentially no safety net. If even in that environment the fundamental health of institutions was the deciding factor, the implications for modern banking and finance are significant.

Why crypto should pay attention

The crypto industry has lived through its own version of bank runs multiple times. The collapse of Terra/Luna, the implosion of FTX, the unraveling of Celsius and BlockFi. In each case, every single one of those failures traced back to fundamentally broken balance sheets, overleveraged positions, or outright fraud.

Consider the contrast between two recent episodes. When Circle’s USDC briefly depegged in March 2023 following Silicon Valley Bank’s collapse, it recovered because the underlying reserves were fundamentally sound. When Terra’s UST depegged two years prior, it spiraled into oblivion because the mechanism backing it was aspirational rather than actual.

What this means for investors

If the Fed’s own research confirms that institutional health is the primary safeguard against banking crises, that strengthens the case for regulatory frameworks that prioritize transparency and proof of reserves. For crypto, this supports the industry’s push toward proof-of-reserves standards and on-chain transparency, while also giving regulators ammunition to impose stricter capital requirements and balance sheet standards on crypto institutions that want to hold customer deposits.

The release of this historical database by the New York Fed is itself significant. By making this data available, researchers and market participants can better model how banking crises develop and, more importantly, how they don’t develop when institutions maintain solid financial footing.

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