Business
Fact-checked

At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.

Learn more...

What is a Bank Run?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

A bank run is a situation in which depositors panic and withdraw their deposits simultaneously from a banking institution. The result of the massive drain on the bank's resources is often insolvency for the bank, ironically creating a situation in which a panic about insolvency creates an insolvency. When multiple bank runs occur at once, the result can be a widespread financial crisis known as a banking panic. Banking panics have played a prominent role in numerous financial crises, such as the Great Depression in the United States.

The process which leads to a bank run is typically gradual. First, the economy begins to take a downturn, causing consumers to become restless. Then, consumers start to worry that their funds on deposit are not safe, and they consider withdrawing those funds and putting them in another institution, or withdrawing them from circulation altogether. As panic builds and consumers grow more and more stressed, they descend upon a bank in a massive group to demand their funds on deposit.

A bank run is when panicked people try to withdraw all their deposited money from a bank in a short period of time.
A bank run is when panicked people try to withdraw all their deposited money from a bank in a short period of time.

Banks, however, do not retain all of the funds they have on deposit. Most banks use a system known as fractional-reserve banking, in which a percentage of overall deposits is kept on hand, while the bulk of the funds on deposit are invested in a variety of ways. This practice allows banks to make money. When enough bank customers arrive to demand their funds, a bank may run out of funds on hand, and become insolvent.

A bank run makes it difficult for remaining customers to write checks, and may ultimately cause the bank to fail.
A bank run makes it difficult for remaining customers to write checks, and may ultimately cause the bank to fail.

As a bank struggles to meet consumer demands in a bank run, it may call in loans, securities, and other investments, thus causing a ripple effect. Debtors may become insolvent as a result of a bank run, as might companies associated with the bank's investments. Once one bank fails as a result of a bank run, it can also stimulate further panic and uncertainty, causing a banking panic.

Many countries have measures in place which are designed to mitigate the effects of bank runs. In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) guarantees deposits of up to $100,000 US, which means that even if a bank becomes insolvent, bank customers will still get their money back. For customers with an excess of $100,000 on deposit, however, a bank run creates the risk of losing those additional funds, which may devastate savings and retirement accounts.

During a financial panic, it is important for banking customers to keep their heads. Anyone who has funds on deposit in an institution which is struggling financially has certain rights as a consumer. These rights are typically outlined in the pamphlets the bank provides when someone opens an account, and customers can also contact agencies like the FDIC or the equivalent for more information.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

Discussion Comments

nolo

It's been a while, but the last I heard, the FDIC was on the verge of bankruptcy. What happens to our money if there is a bank run and the FDIC can't pay up?

anon67680

There is a bank run coming in the weeks ahead the rules for getting your money out are already laid. you have to give any bank seven days notice to draw out money and there is a set limit as to what you can get out at any one time.

Post your comments
Login:
Forgot password?
Register:
    • A bank run is when panicked people try to withdraw all their deposited money from a bank in a short period of time.
      By: Pefkos
      A bank run is when panicked people try to withdraw all their deposited money from a bank in a short period of time.
    • A bank run makes it difficult for remaining customers to write checks, and may ultimately cause the bank to fail.
      By: JJ'Studio
      A bank run makes it difficult for remaining customers to write checks, and may ultimately cause the bank to fail.