Bank Run

Published Aug 21, 2023

Definition of Bank Run

A bank run is a situation in which a large number of customers of a bank withdraw their deposits simultaneously. That means it is a situation in which customers lose confidence in a bank’s ability to meet its obligations and decide to withdraw their money. This can lead to a liquidity crisis for the bank, as it may not have enough cash on hand to meet all the withdrawals, due to fractional reserve banking.

Example

To illustrate this, let’s look at the fictional Bank of Bob. Bob’s bank has been around for a few years and has built up a loyal customer base. However, one day, rumors start to spread that Bob’s bank is in financial trouble and may not be able to meet its obligations. As a result, many of Bob’s customers decide to withdraw their money. This leads to a bank run, as more and more customers line up to withdraw their deposits.

In this situation, Bob’s bank is in a difficult position. It may not have enough cash on hand to meet all the withdrawals. That means it has to borrow money from other banks or the central bank to cover the shortfall. If the bank run continues, it may eventually lead to the bank’s insolvency.

Why Bank Runs Matter

Bank runs can have serious consequences for both the bank and its customers. For the bank, it can lead to a liquidity crisis and, in extreme cases, even insolvency. For the customers, it can mean the loss of their deposits. That is why bank runs are a major concern for regulators and policy-makers. To prevent bank runs, they have implemented various measures, such as deposit insurance schemes, to protect customers’ deposits and ensure the stability of the banking system.