What is  Bank Run ? Reasons/ Examples

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May 13, 2024

What is  Bank Run ? Reasons/ Examples

Why in news? The term bank run was in news recently.

What is Bank run?A bank run happens when a large number of depositors withdraw their money from a bank at the same time because they fear the bank is going bust (failing). It’s a self-fulfilling prophecy in a way, as the mass withdrawal can actually cause the bank to run out of cash, even if it was initially healthy.


Loss of confidence: The primary trigger is a loss of depositor confidence in a bank’s stability. This can be caused by rumors, news reports about the bank’s financial problems, or a general economic downturn.

Fractional-reserve banking: In most countries, banks only keep a fraction of deposited money as actual cash on hand. They lend out the rest to earn interest. During a bank run, if too many people withdraw their money at once, the bank might not have enough cash reserves to meet all the demands.


Great Depression (1929-1933): This period saw a wave of bank runs in the US as many banks collapsed due to risky investments and a weak economy. The FDIC (Federal Deposit Insurance Corporation) was created in response to prevent future bank runs by insuring deposits up to a certain limit.

Northern Rock (2007): This British bank became the first major casualty of the 2008 financial crisis. Depositors panicked and withdrew their funds, leading to the bank’s nationalization.


Bank failure: A bank run can quickly deplete a bank’s cash reserves, forcing it to limit withdrawals or even shut down completely.

Economic crisis: Widespread bank runs can cripple an entire financial system and lead to a broader economic recession.

Government intervention: To prevent bank runs, governments often step in with emergency measures like deposit insurance guarantees or liquidity injections for banks.


Deposit insurance: This government-backed program ensures depositors get their money back (up to a limit) if their bank fails.

Regulation: Stricter banking regulations can help prevent risky lending practices that contribute to bank failures.

Transparency: Clear communication from banks about their financial health can help maintain depositor confidence


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What is Bank Run ? Reasons/ Examples | Vaid ICS Institute