History Word Lesson: Bank Holiday

Being in the Holiday Season, I would appreciate the moment to define a term used in the financial and/or banking industry specifically 'Bank Holiday.' The definition of Bank Holiday is any business day during which commercial banks and savings & loans institutions are closed for business to the public, specifically at physical locations. These holidays usually coincide with federal holidays in the United States, but each country defines is own bank holidays. The definition of the term I am talking about is used less frequently today; in which it is also referring to a day where there is an emergency bank closure to avert a bank run. This type of bank holiday occurred as a result of the Emergency Banking Act of 1933 during the Great Depression in the United States.

What is a 'Bank Run?' A bank run occurs when a large number of customers of a bank or another financial institution withdraw their deposits simultaneously due to concerns about the bank's solvency. As more people withdraw their funds, the probability of default increases, thereby prompting more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.

A bank run is typically the result of panic rather than true insolvency on the part of the bank. However, the bank does risk default as more individuals withdraw funds; what began as panic can turn into a true default situation. A bank run triggered by fear that pushes a bank into actual insolvency represents a classic example of a self-fulfilling prophecy. What was the 'Emergency Banking Act Of 1933?' The Emergency Banking Act Of 1933 was a bill passed during the administration of U.S. President Franklin D. Roosevelt in reaction to the financially adverse conditions of the Great Depression. The measure, which called for a four-day mandatory shutdown of U.S. banks for inspections before they could be reopened, sought to re-instill investor confidence and stability in the banking system. Banks were only allowed to re-open once they were deemed financially sound.

The act was passed during this shutdown, in hopes that Americans would renew their confidence by the time the banks re-opened. It also extended the power of the president during this time of hardship, allowing him the executive power to make the decisions necessary to salvage the economy.

The point of the history lesson today is to remember to not panic, if the tax legislation affects you directly or indirectly; do not panic. We will get through and prosper as a nation as we always do. The professionals at the Center are ready and available to answer any questions you may have, feel free to contact us at (618) 997-3436 or by email at info@taxplanning.com.