Bank Run Definition
A bank run, also known as a run on the bank, occurs when a large number of customers of a bank or another financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, this can lead to the bank’s insolvency.
Bank Run Key Points
- A bank run is triggered when many customers lose faith in a bank’s ability to repay their deposits and rush to withdraw their money at the same time.
- Bank runs can lead to a vicious circle: as more people withdraw their money, the likelihood of the bank becoming insolvent increases, which in turn prompts more people to withdraw their money.
- Bank runs can destabilize the banking system and lead to wider economic problems, such as a recession or depression.
- Central banks often act as a ‘lender of last resort’ to prevent bank runs, providing emergency funds to troubled banks.
- Deposit insurance schemes are also used to prevent bank runs by guaranteeing, up to a certain amount, the deposits of bank customers.
What is a Bank Run?
A bank run is a situation where a large number of bank customers withdraw their deposits because they believe the bank may become insolvent. This usually happens when customers believe their bank is, or might become, insolvent. As more people withdraw their funds, the probability of default increases, and this encourages more people to withdraw their money, creating a vicious cycle.
Why Does a Bank Run Happen?
Bank runs usually happen when the public loses confidence in a bank’s ability to repay its depositors. This can be triggered by negative news about the bank, such as reports of financial losses, rumors of insolvency, or a downgrade by a credit rating agency. In some cases, a bank run can be sparked by fear and panic, even if the bank is actually solvent.
When Does a Bank Run Occur?
A bank run can occur at any time, but they are more likely during times of economic instability or crisis. They are particularly likely when there is a lack of confidence in the banking sector as a whole.
Where Does a Bank Run Happen?
Bank runs can happen anywhere in the world. They are not limited to any particular country or type of economy. However, they are more likely in countries with weak banking regulations and inadequate deposit insurance schemes.
How Does a Bank Run Affect the Economy?
Bank runs can have serious consequences for the economy. They can lead to a decrease in the money supply, which can trigger a recession or depression. They can also lead to the failure of other banks, in what is known as a systemic banking crisis. This is why central banks and governments take steps to prevent bank runs, such as providing deposit insurance and acting as a lender of last resort.
