The psychology of bank runs

The announcement today that Greek banks will be closed at least until the referendum on Sunday was apparently prompted by the decision of the European Central Bank (ECB) to end the financial support that has allowed the banks to function despite people withdrawing their money for months. The behaviour of the public in withdrawing their money has been described as a ‘bank run’ and, in some places, a ‘mass panic’. Based on our research and the wider literature on so-called ‘panics’ in crowds, three simple points can be made about the current Greek bank run.

1. It is misleading to describe the behaviour of people withdrawing their money as ‘mass panic’. In ordinary conversation, the term ‘panic’ is used to talk about, and to do, different things (such as blaming, excusing and so on); but one consistent association is that of the abandonment of social rules through undue haste. Yet the crowds depicted queuing at Greek ATMs, like those observed by sociologists studying bank runs, have been cooperative and orderly. Another association of the term ‘panic’ is extreme or sudden emotion. But, as is often the case in bank runs, the people queuing were also relatively calm. This suggests that emotion is not the defining issue in bank runs at all.

2. Participating in a bank run, particularly when it’s already begun, is often a reasonable course of action for the individuals concerned. Another implication of the term ‘panic’ is that such behaviour is self-defeating and irrational. In his study of the Home State Savings Bank Run in Cincinnati in 1985, Johnson pointed out that, when everybody else is taking their money out, the real risk is not to oneself but rather being last in the queue and the money runs out. All the individual withdrawals may lead to the collapse of the bank, and so have damaging consequences for the wider collective (including those who have yet to take their money out); yet appeals for people to be patient or to trust the bank would only be heeded where they perceive others (including those other banks and businesses withdrawing funds) to be patient and trusting.

3. Reassurances and other communicative acts may inadvertently create and sustain a bank run. In their study of the 2007 Northern Rock bank run, Gillespie and Cornish note that when the Bank of England gave Northern Rock an emergency loan, this was widely seen as a signal of the bank’s imminent demise. The BBC reported that ‘Treasury Select Committee chairman John McFall urged Northern Rock customers not to panic’. Yet, in a situation where trust was diminishing, such reassurances are likely to have backfire effects – which was precisely the case for Northern Rock.

A last point is that one reason that bank runs are described as panics is because the run is apparently based on a false belief or rumour. From the outside, and with access to all the relevant information, the commentator might be able to judge that the rumours were false – for example that the bank is not really in trouble (yet) and that there is no need (yet) to withdraw funds. But in the current context, when bankers and their allies in government have repeatedly lied and have constructed complex arrangements for their own profits around a series of financial fictions, who’s to say that the rumour among the public about the trustworthiness of the bank is an unreasonable belief? Who should people trust?

By John Drury

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