What is a Bank Run?

A bank run is a phenomenon where a large number of customers simultaneously withdraw their money from a bank, leading to a liquidity crisis and possibly causing the bank to fail. Bank runs are often sparked by rumors or news that a bank is in financial trouble, leading customers to panic and withdraw their funds.

Bank runs can have significant economic consequences, both for the bank and for the broader financial system. In this article, we'll explore what a bank run is, what causes them, and what measures can be taken to prevent them.

What is a Bank Run?

A bank run occurs when a large number of depositors simultaneously withdraw their funds from a bank. The reasons for a bank run can vary, but they usually stem from a lack of confidence in the bank's ability to meet its financial obligations. This lack of confidence can be triggered by a variety of events, such as a major economic crisis, rumors of the bank's insolvency, or news of high-profile bank failures.

When a bank run occurs, it can have a cascading effect on the bank's financial stability. As more and more customers withdraw their funds, the bank's reserves dwindle, making it more difficult for the bank to meet the demands of remaining customers. This can lead to a liquidity crisis, where the bank is unable to fulfill its obligations to depositors and creditors.

If the bank is unable to recover from a liquidity crisis, it may ultimately fail. Bank failures can have far-reaching consequences, particularly if the bank is large or systemically important. They can lead to a loss of confidence in the financial system, a contraction of credit markets, and a slowdown in economic growth.