Bank Run

What Is Bank Run?

A bank run occurs when many depositors try to withdraw their money from a bank at the same time because they fear it may become insolvent. Because banks lend out or invest most of the deposits they hold rather than keeping all the cash on hand, no bank can satisfy all its depositors at once. The fear of a bank's failure can therefore make that failure self-fulfilling: withdrawals drain the bank's reserves and force it to sell assets at a loss, pushing it toward the very collapse depositors feared. Waves of bank runs between 1930 and 1933 caused about one-third of U.S. banks to fail during the Great Depression.

Why It Matters

Bank runs matter because they can spread panic from one weak institution to healthy ones, threatening the whole financial system. To break this dynamic, Congress created the Federal Deposit Insurance Corporation in 1933, guaranteeing deposits so savers would have no reason to rush the doors. Insurance largely ended classic runs in the United States for decades, but they can still happen: in September 2007, Britain's Northern Rock suffered the first run on a British bank in over a century, an early sign of the brewing 2008 crisis. Bank runs remain a central concept for understanding why governments insure deposits and act as lenders of last resort.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What federal agency, created in 1933, insures bank deposits to help prevent bank runs?
  The Federal Deposit Insurance Corporation (FDIC)
• The bank runs of 1930-1933, in which fear of a bank's insolvency caused depositors to withdraw funds and could make that insolvency self-fulfilling, are a classic historical example of what economic phenomenon?
  A bank run
• What British bank experienced a bank run in September 2007, the first run on a British bank in over a century, as an early sign of the brewing crisis?
  Northern Rock