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.

BREAKING DOWN 'Bank Run'

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.

How Bank Runs Happen

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 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.

Bank Run Examples

The stock market crash of 1929 precipitated a spate of bank runs across the country, ultimately culminating in the Great Depression. The succession of bank runs that occurred in late 1929 and early 1930 represented a domino effect of sorts, as news of one bank failure spooked customers of nearby banks and prompted them to withdraw their money. For example, a single bank failure in Nashville led to a host of bank runs across the Southeast.

Other bank runs during the Depression occurred as a result of rumors started by individual customers. In December 1930, a New Yorker who had been advised by the Bank of United States against selling a particular stock left the branch and promptly began telling people the bank was unwilling or unable to sell his shares. Interpreting this as a sign of insolvency, bank customers lined up by the thousands and, within hours, withdrew over $2 million from the bank.

Preventing Bank Runs

In response to the turmoil of the 1930s, governments took several steps to diminish the risk of future bank runs. Perhaps the biggest was establishing reserve requirements, which mandate that banks maintain a certain percentage of total deposits on hand as cash.

Additionally, the U.S. Congress established the Federal Deposit Insurance Corp. (FDIC) in 1933. Created in response to the many bank failures that happened in the preceding years, this agency insures bank deposits. Its mission is to maintain stability and public confidence in the U.S. financial system.

RELATED TERMS
  1. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
  2. FDIC Insured Account

    An FDIC Insured Account is a bank account that meets the requirements ...
  3. Silent Bank Run

    A silent bank run is a situation in which a bank's depositors ...
  4. Retail Banking

    Typical mass-market banking in which individual customers use ...
  5. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  6. Bank Insurance

    Bank insurance is a guarantee by the Federal Deposit Insurance ...
Related Articles
  1. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  2. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  3. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Here's more information about how banks don't need your money to make loans, but they do want it to make those loans more profitable.
  4. Investing

    Analyzing a bank's financial statements

    In this article, you'll get an overview of how to analyze a bank's financial statements and the key areas of focus for investors who are looking to invest in bank stocks.
  5. Personal Finance

    The Evolution of Banking Over Time

    Discover how the evolution of banking has changed the business model. Find out how this system of money management developed into what we know today.
  6. Insights

    How Online Banking Is Overtaking Traditional Banking

    Is traditional banking doomed to be surpassed by online banking?
  7. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
RELATED FAQS
  1. What factors are the primary drivers of banks' share prices?

    Bank share prices are driven by the same forces as any other shares including market sentiment, expectations about the future ... Read Answer >>
  2. What is the average profit margin for a company in the banking sector?

    Learn what the average profit margin is for companies in the banking sector, along with other evaluation metrics often used ... Read Answer >>
  3. How do leverage ratios help to regulate how much banks lend or invest?

    Learn what leverage ratios mean for banks, how regulators restrict leverage, and what impact ratios have on a bank's ability ... Read Answer >>
Trading Center