Bank runs are dramatic: Picture Depression-era footage of customers lined up, trying to get their deposits back. Or recall Lehmann Brothers emptying out in 2008 or Silicon Valley Bank collapsing in 2023.
But what causes these runs in the first place? One viewpoint is that something of a self-fulfilling prophecy is involved. Panic spreads, and suddenly many customers are seeking their money back, until an otherwise solid institution is run into the ground.
That is not exactly Emil Verner’s position, however. Verner, an MIT economist, has been studying bank failures empirically for years and now has a different perspective. Verner and his collaborators have produced extensive evidence suggesting that when banks fail, it is usually because they are in a fundamentally shaky position. A bank run generally finishes off an already flawed business rather than upending a viable one.
“What we essentially find is that banks that fail are almost always very weak, and are in trouble,” says Verner, who is the Jerome and Dorothy Lemelson Professor of Management and Financial Economics at the MIT Sloan School of Management. “Most banks that have been subject to runs have been pretty insolvent. Runs are more the final spasm that brings down weak banks, rather than the causes of indiscriminate failures.”
This conclusion has plenty of policy relevance for the banking sector and follows a lengthy analysis of historical data. In one forthcoming paper, in the Quarterly Journal of Economics, Verner and two colleagues reviewed U.S. bank data from 1863 to 2024, concluding that “the primary cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.” In a 2021 paper in the same journal, Verner and two other colleagues studied banking data from 46 countries covering 1870-2016, and found that declining bank fundamentals usually preceded runs. And currently, Verner is working to make more historical U.S. bank data publicly available to scholars.
Seen in this light, sure, bank runs are damaging, but bank failures likely have more to do with bad portfolios, poor risk management, and minimal assets in reserve, rather than sentiment-driven client behavior.
“From the idea that bank crises are really about sudden runs on bank debt, we’re moving to thinking that runs are one symptom of crisis that runs deeper,” Verner says. “For most people, we’re saying something reasonable, refining our knowledge, and just shifting the emphasis,” Verner says.
For his research and teaching, Verner received tenure at MIT last year.
Landing in a “great place”
Verner is a native of Denmark who also lived in the U.S. for several years while growing up. Around the time he was finishing school, the U.S. housing market imploded, taking some financial institutions with it.
“Everything came crashing down,” Verner said. “I got obsessed with understanding it.”
As an undergraduate, he studied economics at the University of Copenhagen. After three years, Verner was unconvinced the discipline had fully explained financial crises. He decided to keep studying economics in graduate school, and was accepted into the PhD program at Princeton University.
Along the way, Verner became a historically minded economist, digging into data and cases from past decades to shed light on larger patterns about crises and bank insolvency.
“I’ve always thought history was extremely fascinating in itself,” Verner says. And while history may not repeat, he notes, it is “a really valuable tool. It helps you think through what could happen, what are similar scenarios, and how agents acted when facing similar constraints and incentives in the past.”
For studying financial crises in particular, he adds, history helps in multiple ways. Crises are rare, so historical cases add data. Changes over time, like more financial regulations and more complex investment tools, provide different settings to examine the same cause-and-effect issues. “History is a useful laboratory to study these questions,” Verner says.
After earning his PhD from Princeton, Verner went on the job market and landed his faculty position at MIT Sloan. Many aspects of Institute life — the classroom experience, the collegiality, the campus — have strongly resonated with him.
“MIT is a great place,” Verner says simply. “Great colleagues, great students.”
Focused on fundamentals
Over the last decade, Verner has published papers on numerous topics in addition to banking crises. As an outgrowth of his doctoral work, for instance, he published innovative papers examining the dampening effect that household debt has on economic growth in many countries. He also co-authored the lead paper in an issue of the American Economic Review last year examining the way German hyperinflation after World War I reallocated wealth to large business with substantial debt, leading them to grow faster.
Still, the main focus of Verner’s work right now is on banking crises and bank failures — including their causes. In a 2024 paper looking at private lending in 117 countries since 1940, Verner and economist Karsten Müller showed that financial crises are often preceded by credit booms in what scholars call the “non-tradeable” sector of the economy. That includes industries such as retail or construction, which do not produce easily tradeable goods. Firms in the non-tradeable sector tend to rely more heavily on loans secured by real estate; during real estate booms, such firms use high valuations to borrow more, and they become more vulnerable to crashes — which helps explain why bank portfolios, in turn, can crater as well.
In recent years, in the process of studying these topics, Verner has helped expand the domain of known U.S. historical data in the field. Working with economists Sergio Correa and Stephan Luck, Verner has helped apply large language models to historical newspaper collections, unearthing information about 3,421 runs on individual banks from 1863 to 1934; they are making that data freely available to other scholars.
This topic has important policy implications. If runs are a contagion bringing down worthy banks, then one solution is to provide banks with more liquidity to get through the crisis — something that has indeed been tried in the U.S. However, if bank failures are more based in fundamentals about risk and not keeping enough capital on hand, more systemic policy options about best practices might be logical. At a minimum, substantive new research can help alter the contents of those discussions.
“When banks fail, it’s usually because these banks have taken a lot of risk and have big losses,” Verner says. “It’s rarely unjustified. So that means these types of liquidity interventions alone are not enough to stop a crisis.”
The expansive research Verner has helped conduct includes a number of specific indicators that fundamentals are a big factor in failure. For instance, examining how infrequently banks recover their all assets shows how shaky their foundations are.
“The recovery rate on assets is informative about how solvent a bank was,” Verner says. “This is where I think we’ve contributed something new.” Some economists in the past have cited particular examples of struggling banks making depositors whole, but those are exceptions, not the rule. “Sometimes people argue this or that bank was actually solvent because depositors ended up getting all their money back, and that might be true of one bank, but on aggregate it’s not the case,” Verner says.
Overall, Verner intends to keep following the facts, digging up more evidence, and seeing where it leads.
“While there is this notion that liquidity problems can arise pretty much out of nowhere, I think we are changing that emphasis by showing that financial crises happen basically because banks become insolvent,” Verner underscores. “And then the bank run is that final dramatic spasm — which slightly shifts how we teach and talk about it, and perhaps think about the policy response.”
