What Is a Bank Run? Definition, Examples, and How It Works (2024)

What Is a Bank Run?

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.

Key Takeaways

  • A bank run occurs when a large group of depositors withdraw their money from banks at the same time.
  • Customers in bank runs typically withdraw money based on fears that the institution will become insolvent.
  • With more people withdrawing money, banks will use up their cash reserves and can end up in default.
  • Bank runs have occurred throughout history, including during the Great Depression and the 2008 financial crisis.
  • The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to try to reduce the occurrence of bank runs.

What Is a Bank Run? Definition, Examples, and How It Works (1)

How Bank Runs Work

Bank runs happen when a large number of people start making withdrawals from a bank because they fear the institution will run out of money. A bank run is typically the result of panic rather than true insolvency. However, a bank run triggered by fear can push a bank into bankruptcy.

Most institutions have a set limit on how much they store in their vaults daily. These limits are set based on need and security reasons. Many banks also keep specific amounts in reserve at the nation's central bank to minimize the risks related to bank runs and other issues. In fact, the Federal Reserve pays them interest to do so, a program which it calls Interest on Reserve Balances (IORB). This program gives banks an incentive to keep deposits in reserve.

Because banks typically keep only a small percentage of deposits as cash on hand, they must increase their cash position to meet the withdrawal demands of their customers. One method a bank uses to increase cash on hand is to sell assets—sometimes at significantly lower prices than if it did not have to sell quickly. Losses taken when selling assets at lower prices can cause customer concerns, which can trigger withdrawals.

Examples of Bank Runs

In modern history, bank runs are often associated with the Great Depression. In the wake of the 1929 stock market crash, American depositors panicked and began withdrawing their deposits. A succession of bank runs on thousands of banks occurred in the early 1930s, creating a domino effect on the economy.

More recent examples of significant bank runs include those on Silicon Valley Bank, Washington Mutual Bank (WaMu), and Wachovia Bank.

Silicon Valley Bank

The collapse of Silicon Valley Bank in March 2023 was a result of a bank run caused by venture capitalists. The bank reported that it needed $2.25 billion to shore up its balance sheet, and by the end of the following business day, customers had withdrawn about $42 billion. As a result, regulators closed the bank and took control of its assets.

Silicon Valley Bank had last reported $209 billion in assets as of the fourth quarter of 2022, making it the second-largest bank failure of all time.

Washington Mutual (WaMu)

Washington Mutual (WaMu), which had about $310 billion in assets at the time of its failure in 2008, was the largest bank failure in the U.S. Its collapse was caused by several factors, including a poor housing market and rapid expansion. The bank also suffered a run when customers withdrew $16.7 billion within two weeks.

JPMorgan Chase eventually bought Washington Mutual for $1.9 billion.

Wachovia Bank

Wachovia Bank was also shuttered after depositors withdrew more than $15 billion over a two-week period following negative earnings results. Wachovia was eventually acquired by Wells Fargo for $15 billion.

Much of the withdrawals at Wachovia were concentrated among commercial accounts with balances above the limit insured by theFederal Deposit Insurance Corporation(FDIC), drawing those balances down to just below the FDIC limit.

The failure of large investment banks like Lehman Brothers, AIG, and Bear Stearns was not the result of a bank run. Instead, these bank failures resulted from a credit and liquidity crisis involving derivatives, asset-backed securities, and poor risk management practices.

Preventing Bank Runs

In response to the turmoil of the 1930s, governments took several steps to diminish the risk of future bank runs. Perhaps the biggest was establishing reserve requirements, which mandated that banks had to maintain a certain percentage of total deposits on hand as cash. This requirement has since been reduced to zero by the Federal Reserve because other monetary policy tools have been created.

Additionally, the U.S. Congress established the FDIC in 1933 to insure bank deposits in response to the many bank failures in the preceding years. Its mission is to maintain stability and public confidence in the U.S. financial system.

The FDIC provides insurance based on ownership category. There are several FDIC-recognized ownership categories, but generally, each depositor is insured for up to $250,000 in each different category.

In some cases, the FDIC may extend its coverage. For example, when Silicon Valley Bank failed in 2023, the FDIC used funds from the Deposit Insurance Fund to fully reimburse depositors. The money in the fund is furnished by quarterly fees assessed on banks.

In some cases, banks need to take a more proactive approach if faced with the threat of a bank run. For example, they may temporarily close to prevent people from withdrawing their money en masse. Franklin D. Roosevelt implemented another solution when he declared a bank holiday in 1933, calling for inspections to ensure banks' solvency so they could continue operating.

What Is a Silent Bank Run?

A silent bank run is when depositors withdraw funds electronically in large volumes without physically entering thebank. Silent bank runs are similar to other bank runs, except funds are withdrawn via ACH transfers,wire transfers, and other methods that do not require physical withdrawals of cash.

What Is Meant by a Run on the Bank?

This happens when people try to withdraw all of their funds for fear of a bank collapse. When this is done simultaneously by many depositors, the bank can run out of cash, causing it to become insolvent.

Why Is a Bank Run Bad?

Bank runs can bring down banks and cause a more systemic financial crisis. A bank usually only has a limited amount of cash on hand that is not the same as its overall deposits. So, if too many customers demand their money, the bank simply won't have enough to return to their depositors.

The Bottom Line

A bank run is when customers flock to banks, either physically or online, to withdraw their funds because they lose confidence in the bank. In extreme cases, they can cause the collapse of a bank, as a bank run did in 2023 when Silicon Valley Bank became insolvent.

To reduce your risk of losing money in a bank run, you can keep your deposit amounts under the FDIC-insured limit of $250,000 per depositor, per insured bank. If you need to deposit more funds, you can open an account at another bank and receive the same protection.

What Is a Bank Run? Definition, Examples, and How It Works (2024)

FAQs

What Is a Bank Run? Definition, Examples, and How It Works? ›

A bank run occurs when a large group of depositors withdraw their money from banks at the same time. Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and can end up in default.

Which description best fits the definition of bank run? ›

A bank run occurs when depositors (that is, customers) attempt to withdraw their money (deposits) from a bank because they fear the institution will fail. Generally, a bank run occurs en masse. People will attempt to get their cash out at the same time before the bank becomes insolvent (i.e., collapses).

What is the biggest bank run in the world? ›

Silicon Valley Bank's customers withdrew $42 billion from their accounts on Thursday. That's $4.2 billion an hour, or more than $1 million per second for ten hours straight.

What is a bank and how do they operate? ›

Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money people leave in an institution with the understanding that they can get it back at any time or at an agreed-upon future time. A loan is money let out to a borrower to be generally paid back with interest.

What is a run on a bank why is this a problem? ›

As explained above, banks are able to borrow short term and lend long term because, in normal times, not all deposits are withdrawn at the same time. A run occurs when depositors panic and try to withdraw their money simultaneously.

What is a bank run in simple terms? ›

A bank run is when a large number of a bank's customers hurry to withdraw their deposits simultaneously because they believe the bank may fail. A bank run may happen if bank officials state the institution is having financial difficulties or if such information is reported by news outlets or on social media.

What to invest in during a bank run? ›

Stock funds

A stock fund, either an ETF or a mutual fund, is a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are wagering less on any single stock than they are on the economy's return and a rise in market sentiment.

What is the fastest bank run in US history? ›

Over the course of 10 hours, it saw $42 billion in deposits exit, the equivalent of $1 million leaving every second. The next day, deposit customers requested $100 billion in withdrawals. Unable to meet this demand, SVB was seized by the FDIC. This fatal event marked the fastest bank run in US history.

Can banks seize your money if the economy fails? ›

It indicates an expandable section or menu, or sometimes previous / next navigation options. Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

What is an example of a bank run? ›

In 2008, Washington Mutual experienced a bank run in which depositors took out almost $17 billion over just two weeks. Factors included the failing housing market. Ultimately, the bank was purchased by JPMorgan Chase. Silicon Valley Bank.

What causes a bank run? ›

A bank run occurs when a large group of depositors withdraw their money from banks at the same time. Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and can end up in default.

Can banks create money? ›

Banks create money when they lend the rest of the money depositors give them. This money can be used to purchase goods and services and can find its way back into the banking system as a deposit in another bank, which then can lend a fraction of it.

Do banks make money? ›

Banks make money by imposing service charges on their customers. These fees vary based on the products, ranging from account fees (monthly maintenance charges, minimum balance fees, overdraft fees, and non-sufficient funds [NSF] charges), safe deposit box fees, and late fees.

What are the risks of a bank run? ›

There is a risk that it would reduce lending to the real economy, temporarily or permanently. It could also affect the balance sheets of central banks and governments, as well as asset prices, because of higher demand for safe liquid assets. Expanding deposit insurance programs would also reduce risks.

When was the last bank run? ›

In March 2023—15 years after the near-collapse of the U.S. banking system that led to the Great Recession—Silicon Valley Bank (SVB), a key banking institution for start-ups and venture capital firms, was shut down by state regulators amid a bank run.

Are people withdrawing money from banks? ›

Total deposits at commercial banks fell by just over $1 trillion from April 2022 to May 2023. People 40 years old and younger are more likely to pull their money, with 38% of them reporting that they moved deposits compared to 23% of those over 40.

Which description best fits the definition of bank run quizlet? ›

Which description best fits the definition of bank run? A bank run is a situation in which depositors race to the bank to withdraw their deposits for fear that otherwise those deposits would be lost.

What is a bank run quizlet? ›

bank run. a phenomenon when many of a bank's depositors try to withdraw their funds at the same time due to fears of a bank failure.

What happens during a bank run Quizlet? ›

A bank run occurs when a large number of a bank's depositors choose to withdraw their savings out of fear that the bank will fail. Panic of bank failures prompted many depositors to rely on this method.

Which of the following is the best definition of bank? ›

A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.

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