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

Definition

A bank run refers to a situation where a large group of depositors withdraw funds simultaneously from a bank due to fears of the bank's insolvency.
This can lead to a self-fulfilling prophecy where the bank becomes insolvent due to the excessive withdrawals.

Triggered by panic rather than actual insolvency.
Banks typically maintain a limited amount of cash in their vaults, setting limits based on need and security.
Reserve amounts are kept with the central bank and banks are incentivized to maintain these reserves through programs like Interest on Reserve Balances (IORB).
In a bank run, banks may sell assets at lower prices to meet withdrawal demands, leading to further concerns and withdrawals.

Great Depression: A series of bank runs occurred after the 1929 stock market crash, affecting thousands of banks and contributing to the economic downturn.
Silicon Valley Bank (2023): A bank run led to $42 billion in withdrawals in one day, resulting in regulators closing the bank.
Washington Mutual (WaMu): In 2008, a run resulted in $16.7 billion in withdrawals over two weeks, leading to the bank's acquisition by JPMorgan Chase.
Wachovia Bank: Depositors withdrew over $15 billion following negative earnings, leading to its acquisition by Wells Fargo.

Establishing reserve requirements to ensure a percentage of deposits are kept as cash.
Creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 to insure deposits and maintain public confidence.
FDIC insures deposits up to $250,000 per depositor, per insured bank.
In extreme cases, measures such as temporarily closing banks or holidays, as seen in 1933, can be used to prevent runs.

A silent bank run occurs when withdrawals are made electronically without physical presence, e.g., ACH or wire transfers.

Can lead to systemic financial crisis if not controlled.
Banks may not have enough cash to cover all depositor demands, leading to potential insolvency.

To mitigate risk, depositor amounts should be kept under the FDIC-insured limit.
Depositors can open accounts at different banks for additional protection.