Tejvan Pettinger

Bank run definition

A bank run occurs when there is a sudden demand to withdraw money from a bank, that the commercial bank struggles to meet. The first signs of ‘bank panic’ will encourage other depositors to also try and withdraw their savings, causing a further ‘run on the bank.’

In a bank run, investors are trying to get back their deposits before the bank goes out of business and depositors can no longer access their deposits.

A bank run occurs when savers become concerned about the liquidity of a bank and so seek to withdraw their savings and put it other assets, such as cash savings. When a bank receives multiple demands to withdraw money, it becomes unable to meet all the demands and has to call in loans, sell assets or impose restrictions on withdrawals.


The role of the Central Bank

An important role of a Central Bank is to provide liquidity to banks under stress and guarantee saving deposits. It is known as a ‘lender of last resort‘ This helps to reduce the panic about losing deposit and prevent bank runs. (Though there is a risk of creating moral hazard if bad banking decisions are safeguarded by government intervention.)

In the 1930s, the US banking system did not have a system of ‘lender of last resort’, and there were frequent bank runs which led to the collapse of 500 small to medium-sized banks.

Causes of a Bank Run

Bank runs of the 1930s

lender of last resort

In the 1930s, the US saw numerous bank runs. The causes of this were:

Even the smallest negative news could cause problems. In Dec 1930, the New York Times reported a small merchant was advised by the Bank of the United States that his stock was a good investment. But, the merchant took this as a warning that the bank was refusing to sell his stock. The news spread like wildfire and within hours, 3,000 depositors had withdrawn $2 million. (Bank Run at History.com)

Consequences of Bank Run


US Real GDP in the 1930s

The great depression in the US 1929-32

Bank Run Game Theory

If you have savings in a bank. Even if there is only a very small chance of the bank going bankrupt, there is a very strong incentive to make sure you are amongst the first to withdraw money – before the bank can’t return your deposits. If you wait, you risk losing everything. This is why bank runs create a panic and long queues. You lose nothing by being the first and risk-averse. You gain little by hoping the bank panic passes without consequence.

Bank run the UK – Northern Rock

Since Central Banks have played a more active role in securing deposits bank runs are less common. However, in the credit crunch of 2008, bank losses were very sharp and it created the circumstances of banks at risk of going under. The collapse of Lehman Brothers (an investment bank) was a shock and UK banks like Northern Rock were short of liquidity (they had been borrowing money to lend so were very short of liquidity. The Bank of England and the UK government had to explicitly state bank deposits would be secured.

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