Bank Runs

Bank runs occur when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency. As more people withdraw their funds, the probability of the bank collapsing increases, prompting more people to withdraw. Eventually the bank might not have enough in its reserves to cover the withdrawals.

In modern history, bank runs are often associated with the Great Depression. The first banking collapse due to mass withdrawals occurred in 1930 in Tennessee. This incident then went on to spur a string of subsequent bank runs across the country as people heard what happened and sought to withdraw their funds before they lost their savings, a herd mentality that only sped up more bank runs via a negative feedback loop.

One measure to prevent a bank run in the context of the stock market is the practice of temporarily restricting or halting trading at the times of crisis or major corrections. This practice is nothing new, and has been used in the past to rescue tanking markets. Most recent examples include NYSE (New York Stock Exchange) and NASDAQ halting trading on March 12, 2020 and March 9, 2020, as well as following 9/11 attacks, when markets remained closed for a week. This was done purposefully to avoid further sell-offs and cascading liquidations across the market.

Learning from the historical bank runs that have occurred, we developed a few approaches to react proactively and to protect Opulence protocol in the event of a potential bank run:

• Slow it down (Opulence Score)

• Time-locked deposits ($OPLL Vaults)