What is  Bank Run ? Reasons/ Examples

Why in news? The term bank run was in news recently.

What is Bank run?A bank run happens when a large number of depositors withdraw their money from a bank at the same time because they fear the bank is going bust (failing). It’s a self-fulfilling prophecy in a way, as the mass withdrawal can actually cause the bank to run out of cash, even if it was initially healthy.

Causes:

Loss of confidence: The primary trigger is a loss of depositor confidence in a bank’s stability. This can be caused by rumors, news reports about the bank’s financial problems, or a general economic downturn.

Fractional-reserve banking: In most countries, banks only keep a fraction of deposited money as actual cash on hand. They lend out the rest to earn interest. During a bank run, if too many people withdraw their money at once, the bank might not have enough cash reserves to meet all the demands.

Examples:

Great Depression (1929-1933): This period saw a wave of bank runs in the US as many banks collapsed due to risky investments and a weak economy. The FDIC (Federal Deposit Insurance Corporation) was created in response to prevent future bank runs by insuring deposits up to a certain limit.

Northern Rock (2007): This British bank became the first major casualty of the 2008 financial crisis. Depositors panicked and withdrew their funds, leading to the bank’s nationalization.

Impact:

Bank failure: A bank run can quickly deplete a bank’s cash reserves, forcing it to limit withdrawals or even shut down completely.

Economic crisis: Widespread bank runs can cripple an entire financial system and lead to a broader economic recession.

Government intervention: To prevent bank runs, governments often step in with emergency measures like deposit insurance guarantees or liquidity injections for banks.