What is the fundamental definition of a bank run?

A bank run occurs when a large number of bank clients simultaneously withdraw their money due to a belief that the bank might fail in the near future. This is a critical event in fractional-reserve banking systems, where banks only keep a small portion of deposits as cash.

How does fractional-reserve banking contribute to the possibility of a bank run?

In a fractional-reserve banking system, banks lend out most of the money deposited with them, keeping only a fraction as reserves. This means a bank does not have enough cash on hand to meet all withdrawal demands if a significant number of depositors try to withdraw their funds at the same time.

What is the relationship between a bank run and insolvency?

A bank run is often triggered by the fear or reality that a bank is, or might become, insolvent, meaning it cannot meet its financial obligations. The run itself can then increase the likelihood of default, turning a potential problem into an actual bankruptcy.

How can a bank run become a self-fulfilling prophecy?

As more customers withdraw their money during a bank run, the bank's available cash diminishes, increasing the probability of default. This heightened risk encourages even more customers to withdraw their funds, creating a cycle where the initial fear leads directly to the feared outcome.

What actions can a bank take to combat a bank run?

To combat a bank run, a bank might seek additional cash from other banks or the central bank. Alternatively, it could impose limits on withdrawals, schedule cash deliveries to manage demand, encourage longer-term deposits to reduce immediate withdrawal needs, or temporarily suspend all withdrawals.

What distinguishes a banking panic from an individual bank run?

While a bank run involves withdrawals from a single bank, a banking panic, or bank panic, is a broader financial crisis where numerous banks experience runs simultaneously. This often happens as people attempt to convert threatened deposits into cash or exit the domestic banking system altogether.

What is a systemic banking crisis?

A systemic banking crisis is an extreme form of banking panic where virtually all of a country's banking capital is lost. Such crises can lead to severe and prolonged economic recessions due to a lack of available capital for businesses and consumers.

According to Ben Bernanke, what role did bank runs play in the Great Depression?

Former Federal Reserve chairman Ben Bernanke suggested that the Great Depression was significantly worsened by bank runs. He argued that much of the economic damage was a direct consequence of these widespread withdrawals, compounded by the Federal Reserve's failure to prevent deflation.

What are the estimated economic costs associated with systemic banking crises?

Systemic banking crises can be incredibly costly, with fiscal costs averaging around 13% of a country's GDP. Furthermore, the economic output losses can be substantial, averaging about 20% of GDP for significant crises occurring between 1970 and 2007.

What historical events are mentioned as early examples related to bank runs or financial instability?

Early instances related to bank runs and financial instability include cycles of credit expansion and contraction, issues faced by English goldsmiths issuing promissory notes from the 16th century, the Dutch tulip manias (1634-1637), the British South Sea Bubble (1717-1719), the French Mississippi Company (1717-1720), the post-Napoleonic depression (1815-1830), and the Great Depression (1929-1939).

How were bank runs historically used for political leverage, as seen in the 1832 example?

In 1832, reformers threatened a bank run with the slogan 'Stop the Duke, go for gold!' to pressure the government, led by the Duke of Wellington, to pass the Reform Act. This demonstrates how the threat of mass withdrawals could be used to influence political outcomes.

What specific banking regulations in the United States contributed to the prevalence of bank runs during the Great Depression?

During the Great Depression, bank runs were more common in U.S. states where laws permitted banks to operate only a single branch. This structure increased risk, especially in areas dependent on a single industry, compared to banks with multiple branches.

How did the banking panics of November 1930 in the Southern United States begin?

The banking panics in November 1930 started in the Southern United States, triggered by the failure of several banks in Tennessee and Kentucky. These failures led to the collapse of their associated correspondent banking networks.

What was the difference in banking regulation between Canada and the U.S. regarding bank runs during the Great Depression?

During the Great Depression, Canada did not experience bank runs, unlike the United States. This difference is attributed to Canada's distinct banking regulations, which likely provided greater stability.

What is the core issue in fractional-reserve banking that makes banks vulnerable to runs, according to the theory section?

The core vulnerability stems from the asset-liability mismatch inherent in fractional-reserve banking. Banks invest deposited funds in longer-term assets like loans and securities, while depositors can demand their money back on short notice (demand deposits), meaning the bank may not have enough liquid cash to cover all withdrawals.

Explain the Diamond-Dybvig model's perspective on the role of banks and bank runs.

The Diamond-Dybvig model explains that banks act as intermediaries, matching borrowers who need long-term loans with depositors who prefer liquid accounts. It highlights that bank runs can occur due to multiple Nash equilibria; it can be rational for an individual depositor to withdraw funds if they suspect others will, even if it causes the bank to fail.

How do banks profit within the framework described by the Diamond-Dybvig model?

Banks profit by charging a higher interest rate on the long-term loans they issue to borrowers than the interest rate they pay out on the demand deposit accounts held by depositors. This spread allows them to cover operational costs and generate earnings.

What is the 'law of large numbers' and how does it relate to normal bank operations?

The law of large numbers suggests that in a large group, individual random events tend to average out. In banking, this means a bank can reasonably expect only a small, predictable percentage of depositors to withdraw funds on any given day because individual needs for cash are typically uncorrelated.

What are the potential consequences for the broader economy if a bank is forced to liquidate assets rapidly due to a run?

If a bank must quickly sell off its assets to meet withdrawal demands, it may do so at a significant loss. This forced liquidation can disrupt businesses that rely on those assets or loans, potentially leading to further economic distress and even bankruptcies among debtors.

How did Robert K. Merton describe bank runs in relation to the concept of a self-fulfilling prophecy?

Robert K. Merton, who coined the term 'self-fulfilling prophecy', identified bank runs as a prime example. He explained that a rumor or belief, even if initially false, can lead people to act in ways that make the feared outcome (the bank's failure) actually happen.

What is the difference between a bank run, a banking panic, and a systemic banking crisis?

A bank run is the withdrawal of deposits from a single bank. A banking panic involves multiple banks experiencing runs simultaneously. A systemic banking crisis is the most severe, where nearly all banking capital in a country is wiped out, often due to ignored systemic risks and spillover effects.

What measures are typically employed to contain systemic banking crises, and what are their limitations?

Containment often involves emergency liquidity support from central banks, government guarantees, and expansionary fiscal policies. However, these measures are not always successful, and intervention can be delayed, increasing economic stress. Depositor protection can help restore confidence but can be costly.

What actions are considered more effective in resolving systemic banking crises and restoring the banking system?

Effective measures include clearly assessing the scale of the problem, implementing targeted debt relief and corporate restructuring programs, recognizing bank losses promptly, and adequately recapitalizing banks. Swift intervention is crucial, as delays can exacerbate economic strain.

What is a 'silent run' on a bank?

A silent run occurs when depositors and investors lose confidence in a government's ability to support its banking system, leading to a gradual withdrawal of funds, often below insured limits. This can increase funding costs for struggling 'zombie banks' and transfer benefits from healthy institutions and taxpayers to the failing ones.

What are some techniques individual banks use to prevent or mitigate bank runs?

Individual banks may project an image of stability, hide information that could spark panic, slow down withdrawal processes, schedule visible cash deliveries, encourage term deposits over demand deposits, or temporarily suspend withdrawals (suspension of convertibility). They might also be acquired by healthier institutions or have a bridge bank established.

How does deposit insurance function as a systemic technique to prevent bank runs?

Deposit insurance protects depositors' savings up to a certain limit, even if the bank fails. This removes the primary incentive for depositors to withdraw funds simply because others are doing so. However, fears about immediate access during a bank reorganization can still trigger runs.

What is the role of central banks in preventing bank runs?

Central banks act as a lender of last resort, providing short-term loans to banks that are facing liquidity shortages but are otherwise economically viable. This ensures that solvent banks have enough cash to meet their deposit obligations.

What is 'full-reserve banking' and how could it prevent bank runs?

Full-reserve banking is a hypothetical system where banks hold 100% of deposited funds as reserves, meaning they cannot lend out deposited money. This would eliminate the asset-liability mismatch and the risk of bank runs, as banks would always have sufficient funds to meet withdrawal demands.

How do capital requirements, like those in Basel III, help prevent bank runs?

Capital requirements mandate that banks maintain a certain level of capital relative to their assets. By strengthening capital buffers, these requirements reduce the likelihood that a bank will become insolvent, thereby decreasing the risk of a bank run.

What is a 'cyber run' and how does it differ from a traditional bank run?

A cyber run is a rapid withdrawal of institutional deposits triggered by a cyber-attack on a bank's systems. Unlike traditional runs driven by solvency fears, cyber runs are prompted by concerns over losing timely access to funds or the ability to settle payments due to operational disruptions.

What real-world examples illustrate the phenomenon of cyber runs?

Notable examples include the run on Silicon Valley Bank in March 2023, where customers withdrew $42 billion in a single day, and the cyber-attack on Iran's Bank Sepah in June 2025, which disabled services and led to widespread cash withdrawals and increased liquidity support from the central bank.

How have fictional works depicted bank runs?

Bank runs have been a recurring theme in fiction, appearing in plays like Archibald MacLeish's 'Panic' and films such as 'American Madness' (1932), 'It's a Wonderful Life' (1946), and 'Mary Poppins' (1964). These depictions often highlight the panic, fear, and potential collapse associated with such events.

What is the significance of the image showing the American Union Bank in 1932?

The image of the American Union Bank in New York City on April 26, 1932, serves as a visual representation of the era when bank runs were a significant and visible threat to financial institutions and public confidence.

What is the 'asset-liability mismatch' in the context of banking?

An asset-liability mismatch occurs when a bank's assets (like long-term loans) have different maturity dates than its liabilities (like short-term deposits). This mismatch makes banks vulnerable because they might not be able to easily convert assets into cash to meet sudden, large demands for withdrawals from depositors.

What role does transparency play in preventing financial crises like bank runs?

Transparency can help prevent crises from spreading by allowing market participants to better assess the financial health of institutions. During the 2007-2010 subprime mortgage crisis, the complexity of financial assets made assessment difficult, amplifying uncertainty and reluctance to lend.

What is a 'bridge bank' in the context of bank failures?

A bridge bank is a temporary institution set up by regulators or deposit insurers when there is no immediate buyer for a failing bank. It operates temporarily until the failed institution's business can be either liquidated or sold off.

How can the establishment of a 'bad bank' potentially create a moral hazard problem?

A 'bad bank' is created to purchase non-performing assets from private banks. This can create moral hazard because underperforming debtors might be incentivized to file for bankruptcy to have their assets sold to the bad bank, essentially receiving a subsidy for their temporary underperformance.

What is the 'lender of last resort' function, and which institution typically performs it?

The lender of last resort is a role, typically performed by a central bank, to provide short-term liquidity to financial institutions facing temporary shortages. This function is crucial for preventing solvent but illiquid banks from failing due to panic-driven withdrawals.

What is the 'moral hazard' associated with safety nets like deposit insurance and the lender of last resort?

Moral hazard arises because safety nets like deposit insurance and the lender of last resort can reduce banks' incentives to avoid making excessively risky loans. Knowing they are protected or can access emergency funds, banks might take on more risk than they otherwise would.

What are some emergency measures that can be taken when prevention of a banking panic fails?

If preventive measures fail and a banking panic occurs, emergency actions can include declaring a bank holiday, which temporarily closes all banks, or making public announcements by governments or central banks about increased lines of credit, loans, or bailouts for vulnerable institutions.

What is the primary concern for depositors during a cyber run, as opposed to a solvency-driven bank run?

During a cyber run, depositors' primary concern is not necessarily the bank's solvency, but rather the fear of losing timely access to their funds or the ability to conduct payments due to operational disruptions caused by a cyber-attack.

According to the Duffie and Younger study on cyber runs, what is a potential issue with current prudential rules like the Liquidity Coverage Ratio (LCR)?

The study suggests that while banks might hold enough liquid assets to meet LCR assumptions, cyber-run outflows could occur much faster than these assumptions anticipate. This implies that current rules might not be sufficient to handle the speed of withdrawals during a severe cyber-attack.

What is the proposed 'emergency payment node' as a safeguard against cyber runs?

An emergency payment node is a proposed system, essentially a narrow, pre-authorized payment bank. It would remain dormant during normal times but could be activated during a systemic operational outage to process essential wholesale payments between critical financial firms, ensuring payment system continuity.

How did the 1920 Banque Royale incident in France relate to bank runs?

The 10 livres tournois banknote issued by the Banque Royale in France in 1720 is associated with a period of financial chaos. In 1720, shareholders demanded cash payments, leading to a run on the bank and significant disruption.

What does the image of the Montreal City and District Savings Bank in 1872 depict?

The image depicts a bank run on the Montreal City and District Savings Bank, showing the mayor addressing a crowd of depositors. This illustration, printed in the Canadian Illustrated News, captures a historical instance of public panic and withdrawal.

What is the significance of Walter Bagehot's book 'Lombard Street' in the context of bank runs?

Walter Bagehot's book 'Lombard Street: A Description of the Money Market' provides an influential early analysis of the role of the lender of last resort. It discusses how central banks should manage liquidity during financial crises to prevent systemic collapse.

What is the 'Great Bullion Famine' mentioned in the context of financial history?

The Great Bullion Famine, occurring approximately from 1400 to 1500, refers to a period of scarcity in precious metals like gold and silver, which could have impacted the stability and liquidity of financial systems of that era.

What was the 'Kipper und Wipper' phenomenon?

The Kipper und Wipper was a financial crisis in the Holy Roman Empire between 1621 and 1623, characterized by widespread debasement of coinage and speculative bubbles, leading to significant economic disruption.

How did the 'Encilhamento' affect Brazil's financial system?

The Encilhamento was a speculative bubble and subsequent crash in Brazil from 1890 to 1893, fueled by excessive credit and stock market speculation. It led to widespread bankruptcies and a severe financial crisis.

Bank Run Wiki: Financial Fragility: A Deep Dive into Bank Runs

Dive in with Flashcard Learning!

When you are ready...
🎮 Play the Wiki2Web Clarity Challenge Game🎮

Understanding Bank Runs

Definition

A bank run occurs when a significant number of depositors withdraw their funds from a financial institution simultaneously, driven by a belief that the bank may become insolvent. This collective action, often fueled by fear or rumor, can transform a potentially solvent bank into an actual bankrupt entity.

The Mechanism

In a fractional-reserve banking system, banks hold only a fraction of deposits as liquid cash, investing the remainder. If too many depositors demand their money at once, the bank may lack sufficient reserves, leading to a self-fulfilling prophecy of failure. This can escalate into a broader banking panic.

Systemic Impact

A systemic banking crisis, where numerous banks fail concurrently, can devastate an economy. Such events lead to widespread bankruptcies, credit unavailability, and severe economic recessions, as witnessed during periods like the Great Depression. The economic output losses can be substantial.

Historical Context

Early Occurrences

Bank runs have a long history, often linked to cycles of credit expansion and contraction. Early examples include runs on English goldsmiths issuing promissory notes and significant events like the South Sea Bubble crash in Britain (1717-19) and the Mississippi Company collapse in France (1717-20).

The Great Depression

The United States experienced numerous bank runs between 1929 and 1933, exacerbating the Great Depression. These events were often triggered by regional failures and amplified by financial conglomerates' collapses. Canada, with different regulations, notably avoided such runs during this period.

1930: Runs began in Tennessee and Kentucky, spreading to New York City and Philadelphia.
1931-1933: Citywide runs affected Boston, Chicago, Toledo, and St. Louis.
Impact: These runs significantly contracted the money supply, deepening the economic downturn.

Global Perspective

Bank runs are not confined to one region. Historical crises in France (1720), Montreal (1872), Berlin (1931), and more recently, Northern Rock in the UK (2007-2008) and Silicon Valley Bank in the US (2023), illustrate the persistent nature of this phenomenon across different economic systems and eras.

Theoretical Foundations

Fractional Reserve Banking

The core issue stems from fractional-reserve banking, where banks maintain only a portion of deposits as reserves. The remainder is lent out or invested in longer-term assets, creating an asset-liability mismatch. This inherent structure makes banks vulnerable to runs, as they cannot meet all withdrawal demands simultaneously.

The Diamond-Dybvig Model

This seminal economic model explains bank runs by highlighting banks' role as intermediaries. Banks match borrowers needing long-term loans with depositors preferring liquid accounts. The model demonstrates how bank runs can be a rational outcome, even based on false rumors, due to multiple Nash equilibria.

Intermediation: Banks bridge the gap between long-term investment needs and short-term deposit preferences.
Liquidity Transformation: Banks offer liquid deposits while investing in illiquid assets.
Multiple Equilibria: A bank run can occur if depositors anticipate others withdrawing, making it rational for individuals to withdraw preemptively.
Self-Fulfilling Prophecy: Fear of insolvency can cause a run, leading to insolvency.

Merton's Prophecy

Sociologist Robert K. Merton identified bank runs as a prime example of a "self-fulfilling prophecy." Even if a rumor of a bank's insolvency is false, the belief in the rumor can lead depositors to withdraw funds, thereby causing the bank to fail. This highlights the psychological and informational dynamics at play.

Systemic Crises & Costs

Cascading Failures

A systemic banking crisis occurs when numerous banks experience runs simultaneously, leading to a cascading failure across the entire financial system. This can result from regulators overlooking systemic risks and spillover effects, potentially wiping out a nation's banking capital.

Economic Toll

The aftermath of systemic banking crises is severe. Studies indicate average fiscal costs of around 13% of GDP and economic output losses averaging 20% of GDP during the initial years of major crises. These costs underscore the critical importance of maintaining financial stability.

Delayed Intervention

Intervention is often delayed, with authorities hoping for natural recovery. However, this delay can exacerbate the crisis, increasing stress on the economy. Timely, targeted, and well-capitalized interventions are crucial for effective crisis management.

Mitigation Strategies

Deposit Insurance

Systems like the U.S. Federal Deposit Insurance Corporation (FDIC) insure deposits up to a certain limit. This removes the primary incentive for depositors to withdraw funds during a crisis, as their savings are protected even if the bank fails. However, fears about immediate access during reorganization can still trigger runs.

Lender of Last Resort

Central banks act as lenders of last resort, providing emergency liquidity to solvent but illiquid banks. This ensures banks can meet deposit demands, preventing runs. However, this role can create moral hazard, as banks might take on more risk knowing they have a safety net.

Regulatory Measures

Various regulations aim to bolster bank resilience. These include higher capital requirements (e.g., Basel III), stricter liquidity rules, and potentially full-reserve banking (though this is largely theoretical). Transparency in financial markets also plays a role in preventing the spread of panic.

Term Deposits: Encouraging longer-term deposits reduces immediate withdrawal pressure.
Suspension of Convertibility: Temporarily halting withdrawals can stop a run, though it signals distress.
Mergers/Acquisitions: Regulators may arrange for failing banks to be acquired by healthier institutions.
Bridge Banks: Temporary entities can operate a failed bank until it's sold or liquidated.

Cyber Runs and Modern Threats

The Digital Age Threat

A "cyber run" is a rapid withdrawal of funds precipitated by a cyber-attack on a bank's digital platform. Unlike traditional runs, the trigger is operational—fear of losing access to funds rather than solvency concerns. These outflows can occur much faster than current regulations anticipate.

Safeguarding Systems

Research suggests implementing "emergency payment nodes" and incorporating cyber-run scenarios into supervisory stress tests. Central bank digital currencies could also offer safeguards for payment system continuity during operational outages.

Real-World Examples

The rapid withdrawal of $42 billion from Silicon Valley Bank in March 2023 exemplifies a modern cyber run. Similarly, a destructive cyber-attack on Iran's Bank Sepah in June 2025 led to widespread withdrawals, demonstrating how operational shocks can trigger classic bank run behavior.

Depictions in Popular Culture

Cinematic Portrayals

Bank runs have been a dramatic backdrop in numerous films, often capturing the panic and societal impact. Notable examples include Frank Capra's American Madness (1932) and It's a Wonderful Life (1946), which vividly portray the chaos and human element of these events.

Literary Influence

Literature also explores the theme. Arthur Hailey's novel The Moneychangers features a potentially fatal run on a fictional bank. Upton Sinclair's The Jungle touches upon bank runs as a source of suffering for characters.

Television and Satire

Even animated series like The Simpsons have satirized bank runs, as seen in the episode "The PTA Disbands," where Bart Simpson instigates a run on the Bank of Springfield, spoofing classic cinematic portrayals.

Related Concepts

Market Dynamics

Understanding bank runs requires knowledge of related financial concepts such as credit cycles, liquidity crises, market runs, and the broader landscape of financial crises and economic downturns.

Economic Indicators

Indicators like the Altman Z-score, while not directly predicting runs, are used in assessing corporate financial health. Concepts like Ponzi schemes share similarities in their vulnerability to rapid withdrawal demands.

Regulatory Frameworks

The role of institutions like the Federal Deposit Insurance Corporation (FDIC) and central banks as lenders of last resort are critical components of the regulatory framework designed to prevent or manage bank runs.

Teacher's Corner

Edit and Print this course in the Wiki2Web Teacher Studio

Edit and Print Materials from this study in the wiki2web studio

Click here to open the "Bank Run" Wiki2Web Studio curriculum kit

Use the free Wiki2web Studio to generate printable flashcards, worksheets, exams, and export your materials as a web page or an interactive game.

True or False?

Test Your Knowledge!

Gamer's Corner

Are you ready for the Wiki2Web Clarity Challenge?

Learn about bank_run while playing the wiki2web Clarity Challenge game.

Unlock the mystery image and prove your knowledge by earning trophies. This simple game is addictively fun and is a great way to learn!

Play now

Explore More Topics

Discover other topics to study!

mithapur

benjamin ashkenazi

george mason patriots men's basketball

wyandot people

sts-91

wittenberg

windsor —tecumseh —lakeshore

computer data storage

guillaume raoux

antidepressant

References

A full list of references for this article are available at the Bank run Wikipedia page

Feedback & Support

To report an issue with this page, or to find out ways to support the mission, please click here.

Academic Disclaimer

Important Notice

This content has been generated by an AI model and is intended for educational and informational purposes only. It is based on publicly available data, primarily from Wikipedia, and may not reflect the most current information or nuances of the subject matter.

This is not financial advice. The information provided herein should not be considered a substitute for professional financial consultation, analysis, or advice. Always consult with qualified financial professionals for any decisions related to personal or institutional finance. Reliance on any information provided on this page is solely at your own risk.

The creators of this page are not liable for any errors, omissions, or actions taken based on the information presented.

Financial Fragility: A Deep Dive into Bank Runs

💡 Dive in with Flashcard Learning! 💡

Understanding Bank Runs 🏦

💸 Definition

🔄 The Mechanism

📉 Systemic Impact

Historical Context 📜

🕰️ Early Occurrences

🇺🇸 The Great Depression

🌍 Global Perspective

Theoretical Foundations 🧠

⚖️ Fractional Reserve Banking

💎 The Diamond-Dybvig Model

💡 Merton's Prophecy

Systemic Crises & Costs 💥

🌐 Cascading Failures

💰 Economic Toll

⏳ Delayed Intervention

Mitigation Strategies 🛡️

🔒 Deposit Insurance

🏦 Lender of Last Resort

📜 Regulatory Measures

Cyber Runs and Modern Threats 💻

⚡ The Digital Age Threat

🛡️ Safeguarding Systems

案例 Real-World Examples

Depictions in Popular Culture 🎬

🎞️ Cinematic Portrayals

📚 Literary Influence

📺 Television and Satire

Related Concepts 🔗

📈 Market Dynamics

📊 Economic Indicators

🏛️ Regulatory Frameworks

Teacher's Corner 🧑‍🏫

Edit and Print this course in the Wiki2Web Teacher Studio

True or False? 🤔

❓ Test Your Knowledge! ❓

Gamer's Corner 🎮

Are you ready for the Wiki2Web Clarity Challenge?

Explore More Topics

📜 Discover other topics to study!

References

📜 References

Feedback & Support 👍

To report an issue with this page, or to find out ways to support the mission, please click here.

Academic Disclaimer ⚠️

📜 Important Notice

Dive in with Flashcard Learning!

Understanding Bank Runs

Definition

The Mechanism

Systemic Impact

Historical Context

Early Occurrences

The Great Depression

Global Perspective

Theoretical Foundations

Fractional Reserve Banking

The Diamond-Dybvig Model

Merton's Prophecy

Systemic Crises & Costs

Cascading Failures

Economic Toll

Delayed Intervention

Mitigation Strategies

Deposit Insurance

Lender of Last Resort

Regulatory Measures

Cyber Runs and Modern Threats

The Digital Age Threat

Safeguarding Systems

Real-World Examples

Depictions in Popular Culture

Cinematic Portrayals

Literary Influence

Television and Satire

Related Concepts

Market Dynamics

Economic Indicators

Regulatory Frameworks

Teacher's Corner

True or False?

Test Your Knowledge!

Gamer's Corner

Discover other topics to study!

References

Feedback & Support

Academic Disclaimer

Important Notice