Bank Run

DEFINITION of 'Bank Run'

A situation that occurs when a large number of bank or other financial institution's customers 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 a true insolvency on the part of the bank; however, the bank does risk default as more and more individuals withdraw funds - what began as panic can turn into a true default situation.

Also called a "run."

BREAKING DOWN 'Bank Run'

Because banks typically keep only a small percentage of deposits as cash on hand, they must increase cash to meet depositors' withdrawal demands. One method a bank uses to quickly increase cash on hand is to sell off its assets, sometimes at significantly lower prices than if it did not have to sell quickly. Losses on selling the assets at lower prices can cause a bank to become insolvent. A "bank panic" occurs when multiple banks endure runs at the same time.

In the United States, the Federal Deposit Insurance Corporation (FDIC) is the agency that insures banking deposits. It was established by Congress in 1933 in response to the many bank failures that happened in the 1920s. Its mission is to maintain stability and public confidence in the U.S. financial system.

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