A banking crisis usually refers to a situation in a general market adjustment [1] when faith in banking institutions falls, and people start trying to move their money to other places for safe keeping. This is called a run on the banks. It can also occur due to overextending low quality loans, which in a down market can become essentially worthless.

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[edit ] Notable historical banking crises

[edit ] Panic of 1907

Most [2] agree the banking panic of 1907 forged a consensus of the need for banking regulation and a central bank in the United States. [3] [4] This led to creation of the Federal Reserve in 1916 to oversee banks and serve as a lender of last resort in times of a cash crunch (or more formally, liquidity crisis).

[edit ] Black Tuesday

By 1930 there were approximately 30,000 banks in the United States. Most of these were mom ‘n pop, unregulated neighborhood banks. [5] When the Crash of 1929 occurred, unemployment and foreclosures began to rise. [6] Some people needed to withdraw their savings from these banks, only to find the bank didn’t have the cash in the vault and was holding worthless paper loans on defunct businesses that laid everyone off, or foreclosed real estate that had sunk in value with no market buyers.

In February 1932 the governor of Michigan declared a banking holiday throughout the state. This sent a tremor throughout the country. Rumors of inflation and going off the gold standard flooded the country, leading to more withdrawal of gold from the banks. Foreign depositors began withdrawing balances which set in motion an increased flow of gold out of the country. By inauguration day of the new president twenty-one states had closed their banks.

President Franklin Roosevelt ‘s first act was to declare a bank holiday. After three days of re-organization and mergers, when the banks re-opened, fewer than half survived. Fractional-reserve banking was implemented with regulatory oversight by the Federal Reserve mandating reserve requirements (a portion of bank deposits held in cash reserve). Banks were also required to purchase deposit insurance to rebuild bank customers confidence with FDIC bailout gaurantees. Other reforms followed such as the Glass-Steagall Act [wp ] to regulate and monitor who was granted a bank charter and how they managed their assets and other people’s money, as well as the Banking Act of 1935 which established the Fed’s Open Market Committee.

[edit ] Great Recession