What Is a Bank Run?
Let me explain to you what a bank run really is. It's when customers of a bank or financial institution start pulling out their deposits all at once because they're worried about the bank's solvency. As more people do this, the chance of the bank defaulting goes up, which just makes even more people withdraw their money. In the worst cases, the bank's reserves won't cover all those withdrawals.
Key Takeaways
- A bank run happens when a large group of account holders withdraw their money at the same time.
- These runs are usually triggered by fears that the bank will become insolvent.
- As withdrawals increase, banks deplete their cash reserves and may end up defaulting.
- Bank runs have happened throughout history, like during the Great Depression and the 2008 financial crisis.
- The FDIC was set up in 1933 to help prevent bank runs by insuring deposits.
How Bank Runs Work
You need to understand how these things unfold. Bank runs start when a lot of people make withdrawals because they think the bank is about to run out of money. This is often more about panic than the bank actually being insolvent, but that fear can push it over the edge into bankruptcy.
Most banks don't keep all their money in vaults every day—they have limits based on needs and security. They also hold reserves at the central bank, and the Federal Reserve even pays interest on those through the Interest on Reserve Balances program to encourage it.
Since banks only hold a small fraction of deposits as cash, they have to scramble to get more when withdrawals spike. They might sell assets quickly, often at a loss, which can spark more customer worries and more withdrawals.
Examples of Bank Runs
Look at history to see this in action. Bank runs are tied to the Great Depression—after the 1929 crash, depositors panicked and withdrew funds, leading to runs on thousands of banks in the early 1930s and a broader economic domino effect.
More recently, we've seen them with Silicon Valley Bank, Washington Mutual, and Wachovia. For Silicon Valley Bank in March 2023, venture capitalists triggered a run after the bank said it needed $2.25 billion to fix its balance sheet. By the next day, $42 billion was withdrawn, regulators shut it down, and it became the second-largest bank failure ever with $209 billion in assets.
Washington Mutual failed in 2008 with $310 billion in assets—the biggest U.S. bank failure—due to a bad housing market, rapid growth, and a run where $16.7 billion was pulled in two weeks. JPMorgan Chase bought it for $1.9 billion.
Wachovia also collapsed in 2008 after $15 billion in withdrawals over two weeks following bad earnings. Wells Fargo acquired it for $15 billion, with many withdrawals from commercial accounts dropping just below FDIC limits.
Preventing Bank Runs
Governments stepped in after the 1930s chaos to stop this from happening again. They set reserve requirements so banks keep a percentage of deposits as cash, though the Federal Reserve has since dropped that to zero with other tools in place.
The big move was creating the FDIC in 1933 to insure deposits and build confidence in the system. It covers up to $250,000 per depositor in each ownership category.
Sometimes the FDIC goes further, like fully reimbursing depositors in the Silicon Valley Bank case using its Deposit Insurance Fund, funded by bank fees.
If a run threatens, banks might close temporarily or, like Roosevelt in 1933, declare a bank holiday for inspections to ensure solvency.
What Is a Silent Bank Run?
You should know about silent bank runs too. That's when depositors pull funds electronically in huge amounts without going to the bank. It's like a regular run but done through ACH transfers, wires, or other digital methods—no physical cash involved.
What Is Meant by a Run on the Bank?
Simply put, it's when people rush to withdraw all their funds fearing the bank will collapse. If enough do it at once, the bank runs out of cash and becomes insolvent.
Why Is a Bank Run Bad?
Bank runs are problematic because they can topple banks and spark wider financial crises. Banks only hold limited cash compared to total deposits, so mass demands can leave them unable to pay everyone.
The Bottom Line
In the end, a bank run is when customers swarm to withdraw funds due to lost confidence, and in extreme cases like Silicon Valley Bank's 2023 collapse, it leads to insolvency. To protect yourself, keep deposits under the $250,000 FDIC limit per bank, or spread them across multiple banks for the same coverage.
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