In this article, we’re answering “what is a bank run?”
But in addition to giving you the standard definition, we’ll also be sharing important nuances to consider, signs to watch for to make sure you don’t get left behind, and how to know if you’re already too late.
This article is part of our free series on banking, starting with how to open a bank account, which you can access by clicking here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is a Bank Run?
- What Are the Effects of a Bank Run?
- Frequently Asked Questions
- Ready to Explore Your Options?
What Is a Bank Run?
A bank run occurs when depositors simultaneously request withdrawals, drawing down on a bank’s capital reserves faster than it can replace them, rendering it insolvent. Importantly, during a bank run, depositor withdrawals are driven by a collective fear that the bank is financially unstable, prompting depositors to demand all of their deposits immediately.
Unfortunately, it’s difficult to forecast when, why, or if a bank run is likely to happen ahead of time. This is because bank runs are not a reflection of a financial institution’s underlying financial health. Instead, they are a reflection of the collective confidence that a bank’s customers have in the institution’s ability to continue operating.
In the past, when a bank’s customers lost faith, they would line up out the door and around the corner waiting their turn to request deposits. In comparison to today, this meant a slow bleed of capital that could potentially be offset by efforts of bank management or government intervention. Not to mention, it would take longer for fear to spread across customers as information moved slower.
Not surprisingly, the combination of social media and online banking means that a bank run can take place faster than at any point in history. Fear can spread almost immediately across channels to millions of customers at a single bank. And, in terms of withdrawals, there is the theoretical possibility that all customers can log into their online accounts and request deposits at the same time.
Of course, this combination of mass communication and instant withdrawals contributes to an even greater (and faster spread of) collective fear.
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What Are the Effects of a Bank Run?
The effects of a bank run will depend on the subsequent actions by management, regulators, and government. Likewise, the country in which a bank run takes place can have a dramatic impact on the outcome.
Not surprisingly, deposit insurance schemes such as the FDIC in the United States are viewed as a deterrent. However, when depositors have significantly more than the maximum insurance covered, insurance offers little reassurance.
Importantly, not all countries offer deposit insurance, and those that do offer different levels of coverage. For instance, depositors in the United States are covered up to USD 250,000 on accounts. The European Union covers deposits up to EUR 100,000. The United Kingdom offers GBP 85,000 in coverage. And, Canada covers up to CAD 100,000.
Of course, there are a wide range of other amounts covered by different countries around the world. Likewise, the application, currencies, and effectiveness of deposit insurance varies by country as well.
How Did the Great Depression Affect People’s Bank Accounts?
The Great Depression affected people’s bank accounts by completely wiping out their life savings. In all, 9,000 banks failed. But, unlike today, there was no deposit insurance. Instead, when a bank run took place and a bank failed, depositors were left with nothing. In the end, the Great Depression was a catalyst for government action, resulting in the creation of the Federal Deposit Insurance Corporation (FDIC) and the depositor protections that still exist today.
Frequently Asked Questions
Below are three of the most common questions that we receive from people looking into what a bank run is. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
What Is Meant By Bank Run?
Bank run refers to a large number of customers of a bank requesting to withdraw their deposits simultaneously. This is propelled by a collective fear that a bank is (or will soon be) insolvent and will be unable to return deposits to its customers.
How Do You Stop Bank Runs?
Once a bank run starts, they are almost impossible to stop. Instead, they must be mitigated, typically through regulatory, government, or commercial intervention. Regulatory and government intervention may involve regulators assuming control of the bank and closing operations temporarily or the government providing a financial guarantee to depositors above the normal deposit insurance threshold. On the other hand, commercial intervention may refer to voluntary pursuit of a buyer of the bank or the government brokering an acquisition of the impacted bank by a larger competitor.
Is a Bank Run Possible Today?
Yes, a bank run is possible today. In fact, banks are more susceptible to bank runs today than ever before. This is due to faster dissemination of information and spread of collective fear. Additionally, access to online banking allows for immediate withdrawals. Combined with the widespread concern of a possible recession and financial collapse, this is a dangerous mixture for banks.
Ready to Explore Your Options?
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