A bank run occurs when a large number of customers withdraw their deposits simultaneously due to fears that the bank may fail or become insolvent.

Since banks typically do not keep enough cash reserves to cover all deposits at once because they lend out most of their deposits to borrowers—a sudden surge of withdrawals can create a liquidity crisis.

This, in turn, can lead to the collapse of the bank, even if it is otherwise financially stable.

Bank runs are driven primarily by panic and a lack of trust in the financial institution, and they often spread quickly as fear becomes contagious among depositors.

How Does a Bank Run Happen?

1. Loss of Confidence

A bank run begins when customers lose confidence in a bank’s ability to safeguard their deposits. This could be triggered by news of financial trouble, economic instability, or rumours about the bank’s insolvency.

2. Mass Withdrawals

Fearing the loss of their savings, customers rush to withdraw their funds. As more people withdraw, the bank’s cash reserves are depleted, exacerbating the problem.

3. Self-Fulfilling Prophecy

Even if the bank was financially sound, the mass withdrawals could create a real liquidity problem, making it impossible for the bank to meet its obligations. This can lead to the bank’s actual collapse.

4. Spillover Effect

Bank runs can spread to other financial institutions, especially if they are in the same region or sector. This is known as contagion, and it can destabilize the broader financial system.

What Causes a Bank Run?

1. Economic Instability

During periods of economic downturn or financial crises, people become more cautious about the safety of their money and are quicker to withdraw it from banks.

2. Rumours or Negative News

False rumours or negative media reports about a bank’s financial health can trigger panic among depositors.

3. Lack of Deposit Insurance

In systems without government-backed deposit insurance, customers are more likely to fear losing their savings, making bank runs more likely.

4. Bank Mismanagement

Poor financial practices, such as excessive risk-taking or holding too many non-performing loans, can genuinely threaten a bank’s stability, leading to panic among depositors.

Historical Examples of Bank Runs

1. The Great Depression (1930s)

During the Great Depression in the United States, a series of bank runs caused widespread panic. Many banks lacked sufficient reserves to meet the demand for withdrawals, leading to thousands of bank failures.

These failures worsened the economic crisis, as businesses lost access to loans and depositors lost their savings.

2. Northern Rock (2007)

In the early days of the 2007-2008 Global Financial Crisis, the UK-based bank Northern Rock faced a bank run. Concerns over its reliance on short-term borrowing to finance long-term lending led customers to withdraw their deposits en masse.

The UK government eventually had to nationalize Northern Rock to stabilize the situation.

3. Silicon Valley Bank (2023)

A recent example is the collapse of Silicon Valley Bank in the United States. After announcing losses on its bond portfolio and plans to raise capital, depositors—especially large tech firms—began withdrawing their funds. The run was accelerated by social media, leading to one of the fastest bank collapses in history.

Consequences of a Bank Run

1. Bank Failures

A bank that cannot meet withdrawal demands may collapse, causing depositors to lose their uninsured funds.

2. Economic Disruption

Bank runs disrupt the broader economy by reducing credit availability, leading to reduced investment, job losses, and slower economic growth.

3. Loss of Public Trust

Bank runs erode trust in the financial system, making people more likely to withdraw funds from other banks, even if they are financially stable.

4. Government Intervention

To prevent further panic, governments often step in with measures like bailouts, guarantees, or deposit freezes, which can strain public finances.

How Are Bank Runs Prevented?

1. Deposit Insurance

Governments establish deposit insurance schemes, such as the Federal Deposit Insurance Corporation (FDIC) in the United States, to protect depositors’ funds up to a certain limit. This reduces the likelihood of panic-driven withdrawals.

2. Central Bank Support

Central banks act as lenders of last resort, providing emergency liquidity to banks facing short-term cash shortages.

3. Improved Regulation

Stricter oversight of banks’ financial practices ensures that they maintain adequate capital reserves and manage risks effectively.

4. Communication and Transparency

Clear and honest communication by banks and regulators can help calm fears and prevent rumours from spiralling into panic.

5. Diversification of Banking Systems

Encouraging diverse banking systems with both large and small institutions can reduce the risk of widespread contagion during a crisis.

Modern-Day Bank Runs and Technology

The rise of online banking and social media has made bank runs faster and more severe. In the past, depositors had to physically line up at a bank to withdraw funds, but today, people can move money out of accounts instantly with just a few clicks.

Social media amplifies panic by spreading rumours and fear in real time, potentially triggering large-scale withdrawals in hours rather than days.

Conclusion

Bank runs are a stark reminder of how fragile financial systems can be when trust is eroded. While governments and central banks have developed tools to mitigate the impact of bank runs, they remain a risk, especially in times of economic uncertainty.

By maintaining robust regulations, ensuring transparency, and instilling confidence among depositors, policymakers can help safeguard the stability of the banking sector and the broader economy.