A bank run occurs when a large number of customers withdraw their deposits simultaneously due to concerns about a bank's solvency, potentially leading to financial institution failure. This phenomenon is typically driven by panic rather than actual insolvency, though the resulting liquidity crisis can ultimately cause a bank to collapse. ^{[1] [2]}

An example was the bank run experienced by Silicon Valley Bank in March 2023, after announcing it needed $2.25 billion to shore up its balance sheet. Within a single business day, customers withdrew approximately $42 billion, leading regulators to close the bank and take control of its assets. ^[1]

Overview

Bank runs represent one of the most visible manifestations of financial panic. They occur when depositors lose confidence in a financial institution's stability and rush to withdraw their funds before the bank potentially becomes insolvent. This collective action creates a self-fulfilling prophecy: as more customers withdraw funds, the probability of default increases, triggering even more withdrawals in a dangerous feedback loop ^[1].

The mechanics of a bank run stem from the fractional reserve banking system, where banks keep only a small percentage of deposits as cash on hand while lending or investing the remainder.

Under normal circumstances, this system functions effectively because not all depositors need their money simultaneously. However, during a bank run, the sudden surge in withdrawal demands can quickly deplete a bank's cash reserves ^[1].

Bank runs can spread beyond a single institution, creating systemic risk throughout the financial system. The ripple effects can impact the broader economy, as witnessed during major financial crises throughout history.

The phenomenon underscores the fragile nature of banking systems and the crucial role that customer confidence plays in maintaining financial stability ^[2].

Causes of Bank Runs

Several factors can trigger a bank run:

• Loss of confidence: When depositors perceive a bank as financially unstable, whether due to actual problems or rumors
• Economic downturns: During recessions or financial crises, general anxiety about the economy can lead to heightened concerns about bank solvency
• Contagion effects: Problems at one bank can spread to others as depositors become generally fearful about the banking system
• Misinformation: False information or speculative news can intensify fear and accelerate withdrawals
• Liquidity concerns: If a bank is perceived to have insufficient cash reserves to meet withdrawal demands

The psychological aspect of bank runs is particularly important, as fear and panic can spread rapidly among depositors, especially in the age of digital banking and social media ^[2].

Historical Examples

The Great Depression (1930s)

Bank runs are strongly associated with the Great Depression era. Following the 1929 stock market crash, American depositors lost confidence in the banking system, leading to widespread bank runs.

Between 1930 and 1933, thousands of banks failed across the United States. These events prompted the establishment of the Federal Deposit Insurance Corporation (FDIC) in 1933 to protect depositors and restore trust in the banking system ^[1].

Silicon Valley Bank (2023)

In March 2023, Silicon Valley Bank experienced a modern bank run after announcing it needed $2.25 billion to shore up its balance sheet. Within a single business day, customers withdrew approximately $42 billion, leading regulators to close the bank and take control of its assets.

With $209 billion in assets at the time of failure, it became the second-largest bank failure in U.S. history ^[1].

Washington Mutual (2008)

During the 2008 financial crisis, Washington Mutual (WaMu) suffered a bank run when customers withdrew $16.7 billion over just two weeks. At the time of its failure, WaMu had approximately $310 billion in assets, making it the largest bank failure in U.S. history. JPMorgan Chase eventually acquired Washington Mutual for $1.9 billion ^[1].

Wachovia Bank (2008)

Also during the 2008 crisis, Wachovia Bank experienced a run when depositors withdrew more than $15 billion over a two-week period following negative earnings results. Many of these withdrawals came from commercial accounts with balances above the FDIC insurance limit. Wachovia was ultimately acquired by Wells Fargo for $15 billion ^[1].

Bank Runs in the Digital Age

Modern bank runs differ from historical examples in several ways:

• Silent bank runs: Today, many bank runs occur electronically through ACH transfers, wire transfers, and other digital methods, without customers physically entering bank branches. These "silent bank runs" can happen more quickly and with less visible panic ^[1].
• Social media amplification: Information and misinformation can spread rapidly through social media, potentially accelerating the pace of withdrawals.
• Cryptocurrency exchanges: The digital asset landscape has experienced its own version of bank run scenarios, where crypto exchanges face withdrawal frenzies when questions arise about platform liquidity or solvency ^[2].

Prevention Measures

Several mechanisms have been implemented to prevent bank runs or mitigate their effects:

Deposit Insurance

The establishment of the FDIC in 1933 was a direct response to the bank runs of the Great Depression. The FDIC insures deposits up to $250,000 per depositor, per insured bank, providing confidence that funds are protected even if a bank fails. This insurance has significantly reduced the frequency and severity of bank runs in the United States ^[1].

Reserve Requirements

Historically, banks were required to maintain a certain percentage of total deposits on hand as cash. While the Federal Reserve has since reduced this requirement to zero in favor of other monetary policy tools, banks still maintain substantial liquidity to meet withdrawal demands ^[1].

Temporary Bank Closures

In extreme cases, banks may temporarily close to prevent mass withdrawals. During the Great Depression, President Franklin D. Roosevelt declared a "bank holiday" in 1933, closing all banks for inspection to ensure their solvency before allowing them to reopen ^[1].

Regulatory Oversight

Modern banking regulations focus on ensuring banks maintain adequate capital and liquidity to withstand periods of stress. Regular stress testing and enhanced supervision aim to identify potential problems before they trigger bank runs.

Transparency Measures

Clear communication about a bank's financial health can help prevent the spread of misinformation that might trigger panic withdrawals. Regulatory disclosures and public reporting requirements support this transparency.

Economic Impact

Bank runs can have significant economic consequences:

• Financial institution failures: When banks cannot meet withdrawal demands, they may become insolvent and fail
• Credit contraction: As banks sell assets at discounted prices to raise cash, overall lending capacity in the economy can decrease
• Loss of wealth: Uninsured depositors may lose funds if a bank fails
• Economic slowdown: Widespread banking problems can lead to reduced lending, investment, and economic activity
• Contagion effects: Problems can spread throughout the financial system, affecting even healthy institutions

The systemic risk posed by bank runs explains why governments and central banks often take extraordinary measures to prevent them or limit their spread ^[1].

Risk Mitigation for Depositors

Individual depositors can take steps to protect themselves from the risks associated with bank runs:

• Stay within insurance limits: Keep deposit amounts under the FDIC-insured limit of $250,000 per depositor, per insured bank
• Diversify banking relationships: Maintain accounts at multiple banks to spread risk
• Monitor bank health: Pay attention to news about your bank's financial condition
• Understand insurance coverage: Know which of your accounts are covered by deposit insurance and to what extent
• Maintain emergency funds: Keep some liquid assets outside the banking system for immediate needs during financial stress

These precautions can help depositors maintain access to funds even during periods of banking system stress ^[1].