Bank Run
A bank run is when the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank's solvency. As more people withdraw their funds, the probability of default increases, which, in turn, can cause more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.
Bank Run
Definition
A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously due to concerns about the bank's solvency. As more people withdraw their funds, the likelihood of default increases, leading to even more withdrawals. In extreme cases, the bank's reserves may be insufficient to cover the withdrawals.
Origin
The history of bank runs dates back to the early development of the banking industry in the 19th century. At that time, banks had limited reserves and lacked modern financial regulatory mechanisms, leading to frequent bank runs. One of the most famous cases occurred during the Great Depression in 1929, when numerous banks failed due to runs.
Categories and Characteristics
Bank runs can be categorized into two types: traditional runs and modern runs. Traditional runs involve customers physically going to the bank to withdraw cash, while modern runs include withdrawals through electronic transfers. Traditional runs require customers to be present at the bank, usually during business hours, whereas modern runs can occur at any time, are faster, and have a broader impact.
Specific Cases
Case 1: During the 2008 financial crisis, Northern Rock, a British bank, experienced a severe bank run. Due to concerns about its financial health, customers rushed to withdraw their deposits, ultimately leading to the bank's nationalization.
Case 2: In 2013, during the Cyprus banking crisis, the government announced a tax on deposits, triggering a massive bank run. Customers, fearing their deposits would be seized, withdrew their funds, nearly collapsing the banking system.
Common Questions
1. Why do bank runs happen?
Bank runs typically occur when customers lose confidence in the bank's financial stability and fear that the bank will be unable to return their deposits.
2. How do banks respond to runs?
Banks can respond to runs by increasing liquidity reserves, seeking government assistance, or imposing withdrawal limits.
3. What is the impact of a bank run on the economy?
Bank runs can lead to bank failures, causing instability in the financial system and potentially leading to economic recessions.
