What is Bank Run?
1376 reads · Last updated: December 5, 2024
A bank run is when the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank's solvency. As more people withdraw their funds, the probability of default increases, which, in turn, can cause more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.
Definition
A bank run occurs when customers of a bank or other financial institution withdraw their deposits simultaneously due to concerns about the bank's solvency. As more people withdraw funds, the likelihood of default increases, leading to even more withdrawals. In extreme cases, the bank's reserves may be insufficient to cover the withdrawals.
Origin
The concept of a bank run dates back to the 19th century when the banking system was less developed and public trust in banks was low. Notable historical bank runs include those during the Great Depression in 1929, when numerous banks failed, causing widespread panic withdrawals.
Categories and Features
Bank runs can be categorized into two types: real runs and rumor-induced runs. Real runs are typically triggered by poor financial health of the bank, while rumor-induced runs are caused by misinformation leading to panic. The main features of a bank run are rapid, large-scale withdrawals that can lead to a liquidity crisis for the bank.
Case Studies
A typical case is the Northern Rock bank run during the 2007-2008 financial crisis. Concerns over its financial health led to massive withdrawals, eventually resulting in government intervention and nationalization of the bank. Another case is the 2013 Cyprus banking crisis, where plans to tax bank deposits sparked public panic, leading to large-scale withdrawals.
Common Issues
Investors may worry about the risk of bank runs, especially during times of economic instability. A common misconception is that all banks are prone to runs, but in reality, banks usually have sufficient liquidity management measures to handle short-term withdrawal demands.
