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Can computer failure cause a bank run?
Over the past few days, something strange happened to me: My debit card simply stopped working. This caused a sticky situation when I was traveling, and I was lucky that my cabbie took $27 plus a 20 euro note for a $37 cab fare.
My problem turned out to be a widespread problem with my bank's computer system. This is a bank with a large internet presence and no physical branches in my state, so many customers really were stuck with a cash-free few days (which is less fun than being cash-flush, I assure you.)
So what will I do when the computer problems are solved? I plan on withdrawing $500 so that I'm not caught short if these problems recur next week. More generally, if account-holders fear that computer glitches tend to repeat themselves (computer failure is autocorrelated), then we will all be lining up (electronically) to make withdrawals. Some may even be so dismayed by recent events as to close their accounts.
Why haven't I named the Bank? Because if enough people are aware of this situation, then these correlated withdrawals become a Bank Run. The possibility of online withdrawals certainly sped up the the recent run on the UK-based Northern Rock bank, and website problems raised anxiety. But my (new) fear is entirely a computer-glitch precipitated bank run.
I must admit, I'm not aware of any bank runs - to date - caused by computer problems. But here's a forecast: IT problems will cause a bank run within a decade. Fortunately these sorts of runs are unlikely to cause widespread financial instability. My advice? If you work in IT at a bank: Demand a raise - your bank's future depends on you.
Posted by Justin Wolfers on October 5, 2007 at 08:51 AM in Current Affairs, Economics | Permalink
Comments
The cabbie was the lucky one. Your luck was having a 20 euro note rather than a 20 pound note. ;)
Posted by: londenio at Oct 5, 2007 9:08:54 AM
Justin_Wolfers: Wouldn't naming the bank be *better*? If people don't know which bank it is, they could
just distrust *all* banks, leading to a common mode run, which is bad news. On the other hand, if they
know it's only one bank, that will be a mere differential run, which can be solved by some simple
interbank borrowing.
Posted by: Person at Oct 5, 2007 9:32:43 AM
...it's, what...less than a 1% chance that it's my bank?
why bother worrying about it.
Another option is to have accounts at a couple different banks, with at least *some* money in each. Then, you've got a backup plan.
Posted by: shawn at Oct 5, 2007 9:43:43 AM
Well, Netbank, an all internet bank failed and was shut down recently by the FDIC.
Posted by: wintercow20 at Oct 5, 2007 10:01:12 AM
I always take out cash from my bank's ATM network before a major holiday; while their actual network hasn't ever crashed in totality, it has gone down at least locally or regionally from time to time, and having the bucks in my wallet has saved my bacon more than once.
Posted by: Garth Wood at Oct 5, 2007 10:07:49 AM
Even if people knew the name of the bank, its unlikely that this would cause the problem because cash is only a small aspect of the services you now get from the bank. Taking £500 out isn't going to cause a bank run!
The Northern Rock run was caused by an over simplistic news media, no other significant news and 24 hour news channels!
Posted by: F0ul at Oct 5, 2007 10:16:36 AM
Get the government on it. Market failure ;P
Posted by: John at Oct 5, 2007 11:14:58 AM
I believe it was USAA. I called them yesterday for an unrelated issue but they said they had unusual call volume due to debit card problems. I doubt its going to cause a bank run.
Posted by: Chris at Oct 5, 2007 11:28:53 AM
This seems like a bit of an overreaction. If you are really that concerned you should just keep accounts with two different banks. If one has an IT crash just withdraw from the other one. And a bank run shouldn't make you worry unless you have over the federally insured 100K limit in the bank.
I'd rather take that $500 and earn interest on it rather than have it sit around my house in the case of a possible IT problem/bank run.
Posted by: Colin at Oct 5, 2007 11:50:58 AM
Any stats on withdrawls for the month before the turn of the millenium? I recall that the rumor was that bank software would break.
Posted by: Jethro Clampett at Oct 5, 2007 12:29:26 PM
Hmm, if IT failure means that one cannot withdraw deposits, how can an IT failure cause a bank run (sudden and universal withdrawal of deposits)?
Posted by: Jo at Oct 5, 2007 12:36:09 PM
Justin, if IT is that important, why don't the most productive IT pros get paid like the better doctors, lawyers, and MBAs?
Posted by: caveat bettor at Oct 5, 2007 12:53:46 PM
doctors, lawyers, and MBA
they're not as good looking as MBAs and they don't have license regimes which impose a cap on the supply of labor like doctors and lawyers (the rate limiting being admission to med school and passing the bar in those two cases).
Posted by: razib at Oct 5, 2007 12:58:07 PM
Hmm, if IT failure means that one cannot withdraw deposits, how can an IT failure cause a bank run (sudden and universal withdrawal of deposits)?
It is fear of an IT failure that presents the danger.
Posted by: Peter at Oct 5, 2007 1:30:40 PM
It is indeed USAA. I'm not worried about a run, they are extremely well captialized.
The lack of branches of USAA FSB exacerbates the problem in this situation, but I agree they should give raises to the IT staff!
Posted by: Cusipzz at Oct 5, 2007 1:55:34 PM
Why not use two banks?
IT people know that hard drives burn out and fail, very much in the same way light bulbs do. It's not a question of if, but of when.
The response is to use redundant disks. That way if one disk dies, you're still safe. The odds of both disks failing at the same time is smaller.
(Although not a small as we'd like -- if you buy two of the same type of disk at the same time, and run them concurrently, sometimes the second will fail before you've had a chance to swap out the first.)
Let's say you're right, and IT failure will become a bigger problem for banks in the future. What are the odds that such a problem would hit two banks at the same time?
I'm not sure I agree with you that this will become a bigger problem in the future. I think that geeks are getting better, not worse, at making reliable systems. And it's not a common problem now.
Posted by: Alex at Oct 5, 2007 2:01:04 PM
Uh, you have only one bank? and no additional cards on which you can get a cash advance?
You have to play the odds a bit here and have multiple ways to get cash. If the ATM card won't work, maybe the Visa card, Discover, AMEX, etc. will. Sure, you will have higher fees, but that's probably cheaper (and safer!) than carrying $500 around all the time.
The odds of ALL these systems being down are very low, despite the obvious intercorrelation.
Posted by: ZBicyclist at Oct 5, 2007 2:03:28 PM
I don't remember the details, but several years ago a
major New York clearing (not retail) bank was forced to borrow a gazillion dollars overnight from the fed because their bond-transaction clearing software broke and they couldn't reconcile their accounting ...
Posted by: Robert Ayers at Oct 5, 2007 2:30:10 PM
I still take Jo's point, not peter's. A bank run is caused by people wanting to get their cash *before everyone else*.
An IT error will prevent everyone who has any money from getting access, so you certainly can't have a "run" after the problem becomes clear.
As for the fear of an IT crash, why will that be a problem? Even if Tyler alerts everyone in the country to the problem, and they all believe him, banks will be able to satisfy the temporary blip in cash demand. Meanwhile, it's likely simply to be a timing issue--many of them will then not take out extra cash for a few days.
So, at worst what we're left with is a few days with ATMs that don't have cash in them--that's frustating, but not the makings of a banking crisis.
Posted by: ah at Oct 5, 2007 2:38:10 PM
I think bank runs are highly unlikely in an age when few people bother to carry (or keep at home) more than $50, and wouldn't increase that by much even if they expected a period without cash. The vast majority of large and regular transactions such as rent, bills, grocery and housewares purchases, business expenses, etc etc can all be done with credit cards.
For a few years I never carried any cash. Recently I have needed to carry cash for a few particular things (laundry card increases, my bagel shop and for the change machine for parking) but this still leaves my cash requirement at under $50 a week. And I could always get a cash advance from a credit card in an emergency. It isn't only in big cities either, the few years I lived cashless were primarily spent living rurally. This is also true when traveling, so long as you travel places that take credit cards, which I guess means developed countries.
Posted by: liberty at Oct 5, 2007 2:45:54 PM
...disk failure isn't the problem, I'd bet. with a raid-5, and a raid-5 backup, there's "no" possibility of losing data.
Posted by: shawn at Oct 5, 2007 3:28:51 PM
This is an obvious followup to an earlier posting here by Tyler Cowen
about carrying cash. Rather large amounts of people declared that there
is no need to carry cash because "everybody takes cards" (credit, debit,
whatever). I weighed in on that one about how things do not work, there
are lots of people, who don't, there are social and other situations where
one is much better off with cash, and so and on and on. Needless to say,
this posting makes clear again how these situations can arise. They are
increasingly the unexpected, but one should always expect the unexpected.
I have just returned from Europe. I ran into several situations where
my cards were not accepted, even though some were. Others where I had to
produce cash. I had the wonderful experience of getting 26.38 euros for a
$50 bill at the Munich airport. I had to get out of a cab on the way in
from another airport because it was running a meter on time, did not take
any cards, and the fare hit 35 euros. Got out and walked two miles (I had
some euros I had brought in with me). And, ATMs are not always open or
available everywhere, quite aside from computer failures.
Posted by: Barkley Rosser at Oct 5, 2007 3:50:31 PM
What would you have done if your wallet had been stolen?
My husband and I use USAA. We didn't experience any problems, but saw the note on the web site.
Having lived where there are earthquakes, I know that ATMs don't work when the power fails. I know too that ATMs don't work reliably in hurricanes or tornados or terrorist attacks, so we maintain a few hundred in cash in our house, in small bills (not all $20s). I also don't rely on one bank anyway. We belong to USAA and a physical credit union. I also know how to received a cash advance from my credit card, and when I didn't, I was still able to solve that problem in under an hour with a phone call and then by going to a physical bank.
Solution: carry cash. Have various means of getting it.
IT professionals aren't paid more because 1) their skills aren't rare, and 2) IT departments are cost centers. There's little reason for most companies not to simply farm all of that out to various (and redundant) 3rd parties. How can big failures happen? Because no one understands the interplay of the various systems. Will this happen more and more? Uh, I'd doubt it. Industry wide, more redundancy and more data farming are likely after a small failure like this.
Posted by: Allison at Oct 5, 2007 5:29:27 PM
Well I do work in IT in large banks (specifically on the security side).
Lets make one thing perfectly clear - IT is the Bank. Everything is ones and zeros. So financial institutions are generally ahead of the curve with regards to IT technology, risk management, and processes than other industries. Financial institutions understand that if there is an issue (ATM outage) that impacts trust in the brand and that means lost dollars. So a lot of effort is put into preventing issues. For those people that mention "RAID" or "multiple disks". I'm sorry - you have no clue. IT in large financial institutions operate at a completely different level. We are talking terabytes of storage, massive computer centers, geographical redundancy, data replication to centers 1000s miles away etc... to keep things running.
And IT professionals in financial institutions do get paid more than in other industries. Especially if they operate at the enterprise level. And specific skillsets are rare (IT security for example) and can't be outsourced.
As for me - I keep money in three different banks and keep extra in a safety deposit box.
(and I do know which bank the author is referring too :) )
Posted by: tim at Oct 5, 2007 7:00:57 PM
Tim is right. At the major financial institutions, IT professionals are paid very well indeed. As much as a good lawyer. (Though not nearly as much as an investment banker. We have to be reasonable here...) That said, I always got the impression that the vast majority of intellectual IT resources at these firms were put into risk modeling, rather than the mundane stuff like keeping the ATM connections running. (You know, things like calculating trillions of different possible likely variations of the firm's hundreds of thousands of different positions. Each night.)
Posted by: M.D. Fatwa at Oct 5, 2007 7:40:07 PM
