What is a Bank Run?
A Bank Run occurs when a large number of depositors withdraw their money from a bank simultaneously due to fears that the institution may become insolvent. As withdrawals accelerate, the bank’s liquidity deteriorates, increasing the likelihood of collapse.
Definition
A Bank Run is a rapid and widespread withdrawal of deposits triggered by panic or loss of confidence in a bank’s ability to meet its obligations. It is a self-reinforcing event that can destabilize even solvent institutions.
Table of Contents
- What is a Bank Run?
- Key Takeaways
- Understanding Bank Runs
- Formula (If Applicable)
- Real-World Example
- Importance in Business and Economics
- Types or Variations
- Related Terms
- Sources and Further Reading
- Quick Reference
- Frequently Asked Questions (FAQs)
- Can a bank prevent a run?
- Are depositors protected during bank runs?
- Why do digital bank runs occur faster?
Key Takeaways
- Caused by loss of depositor confidence and fear of insolvency.
- Can affect even fundamentally healthy banks due to liquidity mismatch.
- Often leads to regulatory intervention or emergency liquidity support.
- Digital banking has increased the speed and severity of modern bank runs.
Understanding Bank Runs
Banks operate under a fractional-reserve system, meaning they keep only a portion of deposits as liquid reserves. The rest is loaned out or invested. When too many people attempt to withdraw at once, the bank cannot meet demand.
Bank runs spread quickly through word of mouth, media, and now social platforms. Contagion can spill into other banks, creating systemic crises. Deposit insurance, central bank liquidity facilities, and strong regulatory oversight help prevent and contain runs.
Formula (If Applicable)
Liquidity Stress = Rapid Withdrawals – Liquid Assets Available
Real-World Example
- Silicon Valley Bank (2023): Experienced the fastest bank run in U.S. history due to concentrated depositors and social media-driven panic.
- Northern Rock (UK, 2007): A televised run sparked widespread fear during the global financial crisis.
- Great Depression (1930s): Widespread runs led to creation of deposit insurance systems.
Importance in Business and Economics
Bank runs undermine financial stability, reduce lending capacity, and trigger recessions. They stress payment systems, erode confidence, and force government or central bank intervention.
Types or Variations
| Type | Description | Example |
|---|---|---|
| Classic Bank Run | Physical queues and panic withdrawals. | 1930s U.S. banks |
| Silent (Digital) Run | Rapid online withdrawals without physical presence. | SVB 2023 |
| Contagion Run | Panic spreads to multiple banks. | Eurozone crisis |
Related Terms
- Liquidity Crisis
- Deposit Insurance
- Systemic Risk
Sources and Further Reading
- Federal Deposit Insurance Corporation (FDIC)
- IMF Financial Stability Reports
- BIS: Banking Systemic Risk Publications
Quick Reference
- Core Concept: Rapid withdrawals triggered by fear.
- Key Risk: Can collapse even solvent banks.
Frequently Asked Questions (FAQs)
Can a bank prevent a run?
Strong liquidity buffers, communication, and regulatory support help mitigate risk.
Are depositors protected during bank runs?
Insured deposits are protected up to legal limits; uninsured deposits may face haircuts.
Why do digital bank runs occur faster?
Technology enables instant withdrawals and rapid spread of information.
