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 Corporation (FDIC) in 1933. Created in response to the many bank failures that happened in the preceding years, this agency insures banking deposits. Its mission is to maintain stability and public confidence in the U.S. financial system.

RELATED TERMS
  1. Bank Insurance

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
  2. Bank

    A financial institution licensed as a receiver of deposits. There ...
  3. FDIC Insured Account

    A bank account that meets the requirements to be covered or insured ...
  4. Bridge Bank

    A bank authorized to hold the assets and liabilities of another ...
  5. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  6. Interbank Deposits

    Any deposit that is held by one bank for another bank. In most ...
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

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  4. Personal Finance

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  5. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  6. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  7. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  8. Personal Finance

    The Evolution of Banking

    Banks are a part of ancient history. Find out how this system of money management developed into what we know today.
RELATED FAQS
  1. How does the deposit multiplier affect a bank's profitability?

    Find out how a deposit multiplier affects bank profitability, how it increases the supply of money in the economy and why ... Read Answer >>
  2. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  3. How much does M1 enhance the multiplier effect of fractional reserve banking?

    Explore the impact of M1 on the economy and how the Federal Reserve uses it. Find out how the fractional banking system and ... Read Answer >>
  4. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  5. What impact does the Federal Reserve have on a bank's profitability?

    Learn how the Federal Reserve impacts a bank's profitability with its influence on the discount rate, federal funds rate ... Read Answer >>
Trading Center