Run On The Bank – Bank Runs Explained + Examples

A “run on the bank” is a financial crisis that occurs when a large number of people try to withdraw their money from a bank at the same time. This can happen when people lose confidence in the bank’s ability to repay their deposits. The fear of losing their money can cause a panic, and everyone rushes to the bank to get their money out.

When too many people try to withdraw their money all at once, the bank may not have enough cash on hand to give to everyone. This can lead to a dangerous cycle where more people panic and try to withdraw their money, further depleting the bank’s reserves.

If the bank is unable to meet its depositors’ demands, it may be forced to close its doors and go bankrupt. This can cause widespread financial instability and even lead to a recession.

Governments and central banks often try to prevent runs on banks by ensuring that banks have enough cash reserves to meet their depositors’ demands. They may also provide emergency funding to banks to help them weather financial crises.

Historically, there have been many examples of runs on banks, some of which have had significant economic consequences. Here are a few examples:

1. Great Depression: During the Great Depression in the 1930s, there were numerous bank runs in the United States. As many banks had invested their depositors’ money in risky investments, people lost confidence in the banks and started to withdraw their money en masse. This caused a chain reaction of bank failures that exacerbated the depression.
2. Northern Rock: In 2007, the Northern Rock bank in the UK faced a run on its deposits. News of the bank’s financial difficulties caused many customers to panic and withdraw their money. The UK government eventually had to step in and nationalize the bank to prevent its collapse.
3. Cyprus: In 2013, the government of Cyprus imposed a tax on bank deposits as part of a bailout agreement with the European Union. This caused widespread panic and a run on the country’s banks, as people rushed to withdraw their money before the tax could be applied.
4. Lehman Brothers: In 2008, the investment bank Lehman Brothers filed for bankruptcy, triggering a global financial crisis. Many of Lehman’s counterparties, including other banks, started to panic and withdraw their money from other institutions, causing a credit crunch and liquidity crisis. This led to the collapse of many other financial institutions and a global recession.
5. Silicon Valley Bank 2023: SVB customers withdrew $42 billion from their accounts on Thursday, a whooping $4.2 billion an hour.