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)


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.

How does a run on the bank work? ›

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.

Which description best fits the definition of bank run? ›

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 the biggest bank run in the world? ›

On 9 March 2023, a US$42 billion bank run on Silicon Valley Bank led to the closure of the bank by California and United States regulators, with FDIC-insured deposits assumed by the Deposit Insurance National Bank of Santa Clara. This is currently the biggest bank run in history.

What is a bank and how do they operate? ›

Although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money).

What triggers a bank run? ›

The general cause is a sudden reduction in the full faith and credit of the institution by its customers. For example, the United States stock market crash in 1929 left the public susceptible to rumors of an impending financial crisis.

Is my money safe during a bank run? ›

So even if you worry about a run on the bank – like that scene in "It's A Wonderful Life" where panicked depositors try to pull out all of their money, or a modern version where it can be done electronically – remember that your funds are protected by FDIC or NCUA insurance.

What is a bank run in simple terms? ›

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).

How do you manage a bank run? ›

To combat a bank run, a bank may acquire more cash from other banks or from the central bank, or limit the amount of cash customers may withdraw, either by imposing a hard limit or by scheduling quick deliveries of cash, encouraging high-return term deposits to reduce on-demand withdrawals or suspending withdrawals ...

Can a bank stop you from withdrawing money? ›

By setting withdrawal limits, the bank can control how much they have to distribute at any given time. Just as importantly, if not more so, withdrawal limits are a security feature. By limiting daily withdrawals, banks help protect their customers against unauthorized access.

What banks are failing in 2024? ›

Republic First Bank reported unrealized securities losses in excess of its equity as early as June 2022. State regulators closed Republic First Bank in April 2024, marking the first bank failure of the year.

When was the last bank run in America? ›

Over the course of five days in March 2023, three small-to-mid size U.S. banks failed, triggering a sharp decline in global bank stock prices and swift response by regulators to prevent potential global contagion.

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.

Is money safer in Credit Union? ›

Just like banks, credit unions are federally insured; however, credit unions are not insured by the Federal Deposit Insurance Corporation (FDIC). Instead, the National Credit Union Administration (NCUA) is the federal insurer of credit unions, making them just as safe as traditional banks.

Can banks create money? ›

Most of the money in our economy is created by banks, in the form of bank deposits – the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today exists as bank deposits, whilst just 3% is physical cash.

Do banks make money? ›

Banks charge interest and a variety of fees on the products and services they provide. Banks offer several financial products and services to both consumers and businesses. But as for-profit organizations, banks are in the business of making money.

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.

Can a bank survive a run? ›

If term deposits form a high enough percentage of a bank's liabilities, its vulnerability to bank runs will be reduced considerably. The drawback is that banks have to pay a higher interest rate on term deposits. A bank can temporarily suspend withdrawals to stop a run; this is called suspension of convertibility.

Is it illegal to start a run on the bank? ›

In California, there's been an anti-bank run law on the books since 1917 prohibiting a person from spreading false information about a bank's condition. In this age of deposit insurance and the FDIC, the law hasn't been tested much.

What happens to a bank after a bank run? ›

Once a bank run happens, banks try to cover their losses using reserves or by attracting new depositors. However, these efforts are often unsuccessful. Many banks don't have the cash reserves necessary to cover a major loss of current deposits. If the bank can't cover the losses, it will become insolvent.

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