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Can Americans get spooked into a bank run?

For many Americans born after the Depression, bank runs are just scenes out of movies.
/ Source: The Associated Press

For many Americans born after the Depression, bank runs are just scenes out of movies.

The troubles at British lender Northern Rock PLC show they can still happen, but it's much less likely that Americans will be seen "queueing up" outside banks anytime soon to collect their cash as British depositers have this week. The U.S. banking system has different rules and procedures than its U.K. counterpart to guarantee that the nation's $4.2 trillion in insured deposits are backed by the government.

The U.S. banking industry has its share of problems now, too. Several small mortgage lenders have declared bankruptcy because of the recent spike in mortgage defaults, and other banks have suffered steep losses.

Americans can get spooked just like anyone else — when the U.S. lender Countrywide Financial Corp. acknowledged sharp losses in its mortgage industry, customers packed its bank branches and jammed its online operations, trying to get answers and cash out.

The United States has seen nothing in decades like the billions of dollars that Britons have withdrawn from banks in recent days, however.

The reason is, largely, that the Federal Deposit Insurance Corp. guarantees up to $100,000 per account per bank, and $250,000 for retirement accounts. In Britain, the government guarantees all deposits below 2,000 pounds ($4,000), 90 percent of deposits up to 35,000 pounds ($70,000), and nothing above that.

Furthermore, in the United States, even deposits beyond the $100,000 limit are probably safe, given that the Fed has procedures to keep banks solvent.

The chance of a run on a U.S. bank is "almost nil," according to Richard Bove, a bank analyst at Punk Ziegel & Co. He added that Fed Chairman Ben Bernanke has repeated that he's willing to rescue the banking system, but Mervyn King, governor of the Bank of England, has been less supportive.

Depositors began lining up at Northern Rock branches on Friday. It took until late Monday for British officials to assure customers that the government would guarantee their savings, but not before customers had withdrawn about 2 billion pounds, or $4 billion, in deposits.

The United States has had bank runs in the past. The scene in Frank Capra's 1946 film "It's a Wonderful Life" where the good people of Bedford Falls flock to the struggling Bailey Building and Loan to get their money back may be fictional, but it has some basis in reality.

During the Great Depression in the 1930s, many banks went out of business due to runs because they didn't have the backing of the U.S. government. During the debt crises in the 1980s, people in Maryland and Ohio may remember people lined up outside the few remaining uninsured savings and loans.

But Britain has allowed depositors to take losses in recent memory _ not just in the Edwardian era, which inspired the scene in Disney's "Mary Poppins" where young Michael triggers a bank run by screaming "Give me my money!" after old Mr. Dawes snatches his tiny deposit.

In 1991, when the scandal-ridden Bank of Credit and Commerce International collapsed, British investors didn't get a full payout, said George Benston, a finance professor at Emory University's Goizueta Business School.

U.S. bank runs are possible, as the brief panic over Countrywide suggested. But even if one happens, U.S. depositors shouldn't fret too much about losing their shirts.

Not only are most investors' deposits guaranteed by the government, the Fed is obligated to bail out a bank if its failure would be detrimental to the economy, Benston said. "If it were Citi, Chase, Bank of America — they'd step in."

And as the late economist Murray Rothbard wrote in a 1985 article for the publication "The Free Market" during the savings and loan panic: "Everyone knows that, in the case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system."