What is a bank run? Definition, examples and how it works
What is a bank run?
A bank run happens when many depositors try to withdraw their money from a bank simultaneously, often triggered by concerns about the bank's solvency or stability. Because banks keep only a fraction of deposits in reserve (fractional reserve banking), they may not have enough cash to cover all withdrawals at once.
The panic can become self-fulfilling: even a healthy bank can fail if too many customers withdraw their funds at the same time.
How it works
- Loss of confidence: News, rumors, or real financial trouble cause customers to worry.
- Mass withdrawals: Depositors rush to take out their money.
- Liquidity crisis: The bank cannot meet all withdrawal requests immediately.
- Potential collapse: Without intervention, the bank may fail; in some cases, governments or central banks step in.
Why bank runs matter in finance and crypto
- Can destabilize entire financial systems.
- Have historical significance (e.g., Great Depression, 2008 financial crisis).
- Crypto exchanges can face similar events, known as "exchange runs," when users withdraw assets en masse due to solvency fears.
- Show the importance of transparency, reserves, and risk management.
Bank Runs vs Exchange Runs (Crypto)
| Feature | Bank Run | Exchange Run (Crypto) |
|---|---|---|
| Assets withdrawn | Fiat currency | Cryptocurrencies and stablecoins |
| Trigger | Concerns over bank solvency | Concerns over exchange solvency or hacks |
| Reserves | Fractional reserve banking | Varies — often less transparent |
| Resolution | Government/central bank intervention | User withdrawals until halted or resolved |
Examples
- 1930s: U.S. Great Depression-era bank runs
- 2008: Northern Rock (UK) and Washington Mutual (US)
- 2022: FTX collapse as a modern "exchange run" in crypto
FAQs
- Can bank runs be prevented?: Systems like deposit insurance, central bank lending, and greater transparency help reduce the risk.
- Is my money safe during a bank run?: In insured accounts (e.g., FDIC in the U.S.), deposits up to the insured limit are protected.
- Can digital banking make runs worse?: Yes — online platforms can accelerate withdrawals, making modern bank runs faster and harder to contain.